Two Monetary Policies in One
A summary from The Denver Post of Federal Reserve Chairwoman Janet Yellen’s report Wednesday May 7 to Congress:
- The U.S. economy is improving but the job market remains “far from satisfactory” and inflation is still below the Fed’s target rate.
- Yellen said that as a result, she expects low borrowing rates will continue to be needed for a “considerable time.”
- Yellen’s comments echo signals that the Fed has no intention of acting soon to raise its key target for short-term interest rates even though the job market has strengthened and growth is poised to rebound.
See no evil, hear no evil, speak no evil.
A more realistic assessment of policy since the initial deer in the headlight response by the Bernanke Fed was provided yesterday in the Wall Street Journal by Allan H. Meltzer; “How the Fed Fuels the Coming Inflation.
Some highlights:
The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.
Of the 6.7 trillion in Bush-Obama deficits:
The Federal Reserve financed almost $3 trillion of these deficits by purchasing Treasury bonds and notes. The Fed has also purchased massive amounts of mortgage-backed securities. Today, with more than $2.5 trillion of idle reserves on bank balance sheets, there is enormous fuel for greater inflation once lending and money growth rises.
On the result of QE and the continuing low interest rate environment:
The Fed’s unprecedented quantitative easing since 2008 failed to lead to a robust recovery. The unemployment rate has gradually declined, but the main reason is that workers have withdrawn from the labor force. The stock market boomed, bringing support from traders, but the rise in asset prices of equities didn’t stimulate growth by inducing investment in new capital. Investment continues to be sluggish.
Echoing but not mentioning Robert Higgs’s rational for the slow recovery; Regime Uncertainty:
Most of all the Fed years ago should have recognized that the country’s economic problems weren’t arising from monetary factors. Instead of keeping interest rates low to finance deficits, the Fed should have explained that costly regulation, increased health-care costs, wasteful spending and repeated threats to raise tax rates were holding back the recovery.
Despite the much hyped tapering of QE, the Fed balance sheet, bank excess reserves, and the monetary base have continued to expand since the Yellen ascension. Based on data from the St. Louis Fed FRED, excess reserves, after being relatively flat from November 2013 to January 2014, increased nearly 6.6 percent January-April 2014; expanding from $2.42 trillion to $2.58 trillion. The monetary base exhibits a similar pattern with a 6.2% increase; 3.73 trillion to 3.96 trillion.
While those benefiting from the illusory wealth enhancing aspects of Fed policy continue to cheer, others should be rightly concerned about future prospects for the economy. Meltzer ends with an appropriate reminder of the effects when the Phillips Curve last dominated Fed policy:
We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the “stagflation” of the 1970s. Other prices will follow.
