Ho! Ho! Ho!

From Charles Evans, of “Evans-Rule” fame:

As you all know, in response to the unusual economic circumstances generated by the financial crisis and the Great Recession, the FOMC lowered our traditional policy tool — the target federal funds rate — to near-zero levels in December 2008 and has kept it there since. With the fed funds rate constrained at this lower bound, and economic conditions requiring additional policy accommodation, the Committee also deployed nontraditional policy tools to stimulate activity. We embarked upon large-scale purchases of long-term Treasury securities and agency mortgage-backed securities. We also used new communications tools to provide forward guidance about how long short-term interest rates will essentially remain at their lower bound of zero.

He has the ‘causality’ reversed. The “unusual economic circumstance” was generated by excessively tight monetary policy, which caused the Great Recession and made the financial crisis much worse!

Ryan Avent has a more pointed take:

Not only is the Fed not raising its inflation target, it is tightening while inflation remains well below the 2% target (as it has about 90% of the time since the 2% target was announced in 2012); indeed, just today we learned that the Fed’s preferred inflation gauge rose at just 0.9% in the year to February, down from 1.2% in January. Inflation is also falling in Britain (from 1.9% in January to 1.7% in February). And it is tumbling in Europe. New figures show that Spain has fallen into deflation, making five euro-area economies experiencing outright declines in the price level.

The rich world’s central banks are behaving with a dangerous complacency. Low and falling inflation will retard ongoing recoveries. Perhaps more important, this path forward leaves the rich world with virtually no cushion against future shocks.

Central banks talk an awful lot about the importance of credibility. But talk is cheap. I’m not sure how the Fed can expect anyone to take its word seriously when it has undershot its target nearly every month that target has been in place, when its forecasts make clear that it fully intends to undershoot that target for years to come and indeed on average, and when it is busy pulling away support to the economy while inflation falls ever farther below 2%. It’s a joke.

Ironically, as soon as the Fed made the 2% target official in January 2012, inflation has stubbornly dropped below target!

ZLB_1

And the ‘taper talk’ and its later implementation have destabilized both medium and longer term inflation expectations which have dropped and stayed down, a clear sign that monetary policy has become tighter!

ZLB_2

And there´s little hope for meaningful changes while monetary policy remains “Ad Hoc”.

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