For more than one year monetary policy has been tightening, but the Fed thinks it´s highly accommodative!

Lars Christensen has a good post – Yellen is transforming the US economy into her favorite textbook model:

When I listen to Janet Yellen speak it leaves me with the impression of a 1970s style keynesian who strongly believes that inflation is not a monetary phenomena, but rather is a result of a Phillips curve relationship where lower unemployment will cause wage inflation, which in turn will cause price inflation.

And what that model is doing is to tighten monetary policy!

They should know better. In 2003, Bernanke wrote:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

And those indicators of the stance of monetary confirm that the Fed is tightening the screws, with NGDP growth and inflation going down.

Stance of policy_1

A spillover effect of the monetary policy tightening is the appreciation of the dollar and the fall in commodity and oil prices.

Stance of policy_2

But the geniuses at the FOMC reason from a price change and argue that the fall in inflation is a consequence of the fall in oil prices and appreciation of the dollar, and when these effects dissipate, inflation will climb towards the 2% target!

With that caliber of central bankers, no wonder things are a mess.

One thought on “For more than one year monetary policy has been tightening, but the Fed thinks it´s highly accommodative!

  1. We can only hope that the Bank of Japan and the People’s Bank of China will choose to promote growth rather than fight phantom inflation. The Fed looks hopeless for now.

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