It has taken long, but finally Fed policy is being recognized for what it is: Mediocre!

And it is being recognized as such by none other than Tim Duy, the quintessential “Fed watcher” in “Policy Induced Mediocrity?“:

Why did the Federal Reserve lean against their optimistic 2014 forecast? It seems that monetary policy over the past year can be summarized as a missed opportunity to supercharge the recovery, thereby locking the US economy into a suboptimal growth path.

He shows this actual and potential RGDP chart:

Duy Mediocrity_1And says:

It seems reasonable to believe that if the economy regains potential output by the end of at best 2016, it will be attributable only to further downward revisions to potential output.  And I even wonder whether the Fed would act to achieve their current growth forecasts or ultimately be content to continue along the current trend.  The economy appears to be already molding itself around the lower output path.

Deep down he doesn´t want to believe that such a tragedy was possible in this day and age. But this being the day and age of inflation targeting, there´s no “seems” or “appears” about it. The Fed is getting exactly what it wants!

And the NGDP chart confirms that policymakers are pleased with their actual trend level path! While Duy´s chart shows the consequence the chart below shows the reason.

Duy Mediocrity_2

2 thoughts on “It has taken long, but finally Fed policy is being recognized for what it is: Mediocre!

  1. This excellent post raises another fundamental question and assumption about macroeconomics and monetary policy.

    It is routinely stated that in the long run, monetary policy does not effect real economic output. If you double the money supply, then you will still have your real economy, but at double the prices, etc.

    But the history of Japan, and now the United States, strongly suggests that tight money can permanently cripple economic output, at least in any measure of time that makes sense in human terms. The base of the US economy is much smaller than it would have been with an aggressive pro-growth monetary policy. And the Fed is still crimping growth.

    So, when will the loss in real output be made up? Well, we can keep lowering the bar, and then say we are back to normal.

    In Japan, they never righted the ship. Tight money led to 20 years of deflation and slow growth. In whose lifetime will they make that up? Japan’s GDP monetarily-induced anorexia will be permanent for people living there now.

    Okay, 100 years from now, Japan and USA will probably be where they will be, and looking back to the tight money policies of the BoJ and ECB and Fed may not be instructive. But how about 20 years from now? Maybe if wait 30 years?

    In Japan, after 20 years they were still waiting for normal growth to resume. I prefer not to wait.

    Gun the presses.

  2. “Mediocre” is much too generous of term considering how far behind the trend we are and how many people either want a job and can’t find one (involuntarily retired) or are flipping burgers instead of more productive endeavors – all laid to waste in a $4T hole for just the current year. It’s sickening, and even more so when thinking about how we got here and can’t get out.

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