That´s the logical conclusion from Bernanke´s answers to badly framed questions. The inflation-unemployment nexus is a bad and even dangerous guide to policy. But it´s how the “stabilization” question is framed and acted upon.
To give just one example. To the question:
Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3?
The answer is “automatic”:
“Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…
“The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy.”
On cue the Saint Louis Fed today released this Economic SYNOPSES: Monetary Policy´s Effects on Unemployment, where we read:
The impact of LSAP programs on economic activity depends on the programs’ effects on longer-term interest rates and the responsiveness of aggregate demand to such changes.
A less-recognized risk in LSAP programs is that permanent increases in the monetary base foreshadow eventual increases in inflation that can increase, rather than reduce, unemployment over the long term.
Funny that that long term interest rates went UP after QE2! But as Scott Sumner never tires of saying: both interest rates and the monetary base are not good indicators of the stance of monetary policy. And monetary policy is (still) tight because money demand has risen more than money supply.
Back in 2008, by giving too much attention to a noisy measure of inflation, the Fed was responsible for the aggregate nominal spending meltdown, one not seen since the 1930´s. The economy fell into a deep hole and is not getting out of it because the Fed refuses to “light up the way” by showing “where it wants to go”. The nice thing about such an action – defining a target level – is that if the Fed has credibility (a big if given the prevailing “modes of thought”) very quickly the “market” will get ahead of the Fed so that very little “prodding” by the Fed will actually be necessary.
As Scott reminds me via e-mail: “I just noticed that the last time NGDP growth reached 5% was 2007:4. Nearly two years of “recovery,” and not a single quarter of trend growth in NGDP. And Bernanke mentioned that faster growth threatened inflation”.