In the name of honor, the Fed strives to fail!

Ryan Avent provides the script:

The Fed, which desperately needs more inflation in order to get the longer run federal funds rate up so that it can do its job, is planning, publicly and deliberately, to raise interest rates in such a way that its preferred inflation gauge is at most 2% for the next three years.

Again: the Fed is going to intentionally undershoot its inflation target on average over the next three years, thereby ensuring that it returns to the ZLB during the next downturn, thereby ensuring that it continues to undershoot its inflation target while also missing its maximum employment target. And one can’t be completely sure, but I think the reason they intend to do this is because they fear that setting and hitting a higher inflation target would call into question their credibility.

For more on the bizarre behaviour of the Federal Reserve on this front, see Brad DeLong’s excellent post here. There is a long list of reasons to think that tightening policy too fast is far riskier than tightening too slowly: there is strong evidence of considerable labour market slack in America and abroad, there is considerable disinflationary pressure radiating out from Europe and emerging markets, and the number of potential geopolitical shocks seems to grow by the day. The FOMC seems to be living in a different world altogether.

And it amuses me greatly to read so many odes to (an inevitable) “Great Stagnation”. Is this the best you can get from so many highly trained (and heavily mathematical) economists? Where is the intuition that drove the great minds of the past, regardless of their particular “school of thought”.

The chart provides the sickening visual!

In the name of honor


One thought on “In the name of honor, the Fed strives to fail!

  1. And I nudge even Marcus Nunes on this one: The chart shows 2 percent inflation “target”—but that is not a target from below, it is an average target. The Fed could just as well run 2.5 percent inflation.
    That said, NGDPLT would be better….

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.