The battle lines are being drawn for the Federal Reserve’s monetary policy meeting this week. The prevailing market consensus right now is that no resolution of the debate – which mainly concerns inflation – will happen at the meeting, meaning there will be no change in interest rates, and may not be before the end of this year.
One side of the issue, which seems to be the prevailing view at the central bank, was recently promulgated by Fed governor Lael Brainard at a meeting of the Economic Club of New York. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” she said. “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. What is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization.”
The other side, which appears to be the minority opinion, is represented by William Dudley, the president of the New York Fed, who isn’t overly concerned about the current level of inflation. “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate” to raise interest rates soon, he said recently. “I expect that we will continue to gradually remove monetary policy accommodation.”
The European Central Bank is having the same debate, and the inflation worrywarts are in the majority there, too. At its meeting last week, the ECB raised its economic growth forecasts for the euro currency zone this year to 2.2% from 1.9%, the third straight upward revision. But the recent spike in the euro, which has risen to its highest level since the end of 2014, prompted the bank to lower its inflation forecasts for 2018 and 2019 to well below its 2% target rate – coincidently, the same target rate as the Fed.
Both central banks are now totally focused on raising inflation to what they deem to be the proper level while almost ignoring the more important gains that have been made in the rest of their respective economies. Economic growth is up; job creation is up, unemployment is down. There’s plenty of evidence that the time has come to start loosening monetary policy, but the masterminds who make monetary policy simply aren’t satisfied.
The question is why? What exactly is so magical about that 2% target rate? This debate over inflation resembles the medieval argument over how many angels can dance on the head of a pin.
I would submit the issue isn’t about how high or low inflation is. Rather it’s all about control. And neither the Fed nor the ECB in Europe, having been given – or appropriated – an unprecedented amount of power over the past 10 years, wants to give it up.
This is normal thinking among government technocrats who perceive themselves as indispensable to the public welfare but has been amplified to an extraordinary degree among central bankers who believe they saved civilization from disaster during and after the global financial crisis and can’t imagine life without their guiding hand.
While hardly perfect or back to normal – whatever that means anymore – the U.S. economy has clearly improved since the recession, especially recently, as evidenced by the 3% annualized growth rate in GDP in the second quarter. At the same time, the Fed has basically declared victory over unemployment – one of its two mandates, you’ll remember, in addition to inflation. It has repeatedly indicated that we have reached full employment. Indeed, the Fed’s biggest worry on the jobs front is that the economy is actually in danger of “overheating,” which could cause inflation to spike.
Simultaneously its biggest concern is that inflation is too low. Does that make any sense?
Of course, it doesn’t, which is why this whole debate over inflation is totally phony.
Besides being mainly an academic exercise, what it’s really all about is that the Fed simply doesn’t want to let go of trying to control the U.S. economy. Many, if not most, members of the Fed perceive themselves as the caretakers if not the masterminds directing the economy, and that we are all doomed to lives of poverty and despair if that power is taken away. So with the economy in reasonably good shape, the Fed fears losing that control and is using the fake inflation concern as a justification for maintaining its current tight monetary policy, whether economic reality warrants that or not.
Which is why President Trump’s opportunity to radically reshape the Fed couldn’t have come at a better time. As we know, four members of the Fed’s seven-member board of governors – including Brainard – are leaving or have already left, while Janet Yellen’s term as Fed chair ends in February. The Fed is a big part of the Washington swamp that Trump has vowed to drain. Now’s the chance to start the pumps.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
7 thoughts on “What's Behind the Fed's Inflation Obsession?”
"Fed governor Lael Brainard says. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” she said. “We have been falling short of our inflation objective not just in the past year, but over a longer period as well."
Evidently the woman does no grocery shopping, doesn't carry health insurance or drives a pick-up truck (the new ones can cost $75,000 and up.)
on top of inflation... (an ability to edit comments would be nice)
You think Trump is actually "draining the swamp"? So far all he's done is to bring in a bunch of fresh alligators.
Fraud, obfucastion, treason, greed, lies, cover ups, shall I continue?
They will be selling bonds. Raising interest rates on top of that will be piling on. Duh.
Personally, I am fine with sticking a thumb on top inflation, certainly, in favor of strangling anything beyond the normal yearly tick-tock we have experienced for many years now. Here is why I feel that way, when you shop for a house and your credit is ace's, straights, and flushes w/ 20% down, pre-qualifying me as a buyer, and the very best available mortgage rate a guy earning $75K annually can get in 1980 is over twenty percent (scared me out of the market), a person tends to remember what can happen when inflation is what pops out of the box instead of Jack! When inflation gets to a point certain (an economist can define that point better than I) psychology tends to diverge and then the entire globe gets caught up in the torrent of price hikes! I thank Jimmy Carter and The Carter Administration for nominating Paul Volcker in August '79 and for his Senate confirmation to be Federal Reserve Chair, and then, of course, I thank the Reagan Administration for their wisdom in re-nominating him for confirmation in the Senate to continue as Fed Chair through President Reagan's administration. At 6'7" Volcker wrested the "Grizzly Bear inflation" down to the ground by 1983 the Federal funds' rate had been reduced back down to below 3%. Any of you who made your fortunes under that scenario good for you, but for me as a young pharmaceuticals salesman earning a strong middle-class wage I just had book knowledge about finance, and inflation, all of what we were going through was yet for me to figure out. Inflation can get out of hand so easily it is best to keep that genie in the bottle! The Prize, a book I have read twice, and that I recommend to anyone who loves business and the stories, walks you through the heroics of Paul Volcker and the Reagan Administration before the narrative heads down the road of its the main topic, big oil. Please, please, go back read up about the late 70's and early 80's, it was harrowing, very exciting time to watch people and money!
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