In The Atlantic Matt writes: “The 2% Mystery: Why Has QE3 Been Such a Bust”?
The best way to figure out what the Fed wants is to listen. After all, it tells us what it thinks will happen with GDP, unemployment, and inflation over 1, 2, and 3-year periods. Now, it’s GDP and unemployment predictions have been, in the spirit of generosity, a tad optimistic, but not so for inflation (which, not-so-coincidentally, is the only above variable the Fed controls directly). The chart below looks at the Fed’s core PCE inflation projections since late 2008; upper-range estimates for 1, 2, and 3-year periods are in red, and lower ranges ones are in blue. This is what a 2 percent inflation ceiling looks like.
There’s a lot going on here, but there’s a depressingly simple message in this chart: QE3 isn’t working, because the Fed doesn’t want it to work.
Exactly one year ago I wrote “Obsessions are a formidable barrier to economic progress”:
In the second half of the 1980s, 1990s and first half of the 2000s, inflation AND unemployment remained contained. In my interpretation this favorable combination came about because the Fed in fact stabilized nominal spending along a trend path. Then Bernanke took over and brought with him the “obsession” with inflation. The outcome was the “Great Recession” (“Lesser Depression” or “Second Great Contraction”). Four years on we are still a long way from escaping this predicament because, just as in the 1970s, the “obsession” that “caused” the “GR” is alive and well.
One year has passed. QE3 has come along later supplemented by the Evans-Bernanke (threshold) rule, and the prospects have remained bleak. And the reason for that is the 2% obsession!