When will the Fed recognize its failures?

Everybody and the Pope is waiting for the end of the FOMC meeting on Thursday, particularly if it will signal the time of the “feared lift-off”.

The trouble is that the Fed thinks that for the past six years it has followed an “easy” or “accommodative” monetary policy by keeping interest rates on the “floor”!

The opposite, however, is true. Monetary policy has remained tight, or even very tight, throughout this time.

What if interest rates are low because expectations of inflation and nominal spending growth are low (as Friedman reminded us long ago?). This might be so because “modern” central banking has shunned what´s going on with the money supply; and low money growth is the driving force behind today´s low interest rate, inflation and spending growth!

The charts illustrate the argument. Conservatively, I have let the initial (2008) drop in the price level (relative to trend) and the initial fall in nominal spending (NGDP) relative to trend to be bygones, forever forgotten.

Even so, the price level remains far below what it should be if the 2% target had been pursued during the recovery and the level of spending remains far below the level that would have materialized if the Fed had “cranked” a 5.5% nominal spending growth (the “Great Moderation” NGDP growth rate) after NGDP tanked in 2008.

Fed Failure_1

Fed Failure_2

Not surprisingly, both medium and long-term inflation expectations have recoiled during the recovery.

Fed Failure_3

And all this naturally follows the very low rate of broad (Divisia M4) money growth observed during the so called recovery!

Fed Failure_4

By concentrating attention on interest rates and showing “eagerness” to get them up, the Fed will instead throw the economy to the ground!

Update: The “Dot Bubble

Fed Failure_5

5 thoughts on “When will the Fed recognize its failures?

  1. It seems almost inevitable this will happen. The unemployment rate chart shows the rate NEVER stands still but always cycles. The lower it goes the more inevitable the turn. And the turn this time will entirely be due to the Fed raising rates. HT the Fed.

  2. Also, this recent history underlines the danger of an IT. The Fed does not regard itself as a failure since and including 2008, as it has been under its IT target.

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