Where does monetary policy enter the Fed´s equation?

To them, inflation, or its absence, is purely a cost phenomenon, pushed up or down by oil prices and/or the dollar and unemployment! Worse, they insist on reasoning from a price change! From the statement:

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.

That “sing-a-long” has been going on for such a long time that “medium-term” has turned into “long-term” many moons ago!

I reproduce a set of charts that indicate the tightening of monetary policy (gauged by the falling trend in NGDP growth since mid-2014) is bringing the economy closer and closer to a recession (maybe in several quarters down the road the NBER will say that it began in early 2016!)

FOMC 270116_1

FOMC 270116_2

After leaving the Fed, Kocherlakota has been very “vocal”. From a post today:

Monetary Policy is Not About Interest Rates

The Federal Open Market Committee has a problem.  The problem is not that it raised rates by a scant quarter percentage point in December.   The problem is the overall policy framework that led the Committee to take that action.  The Committee needs to switch to a framework that is less focused on a particular time path of interest rates, and more focused on the achievement of its goals.    

The FOMC’s current policy framework goes back to at least mid-2013.   It can be defined by two key words gradual and normalization.  Both words refer to the level of monetary accommodation.  In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to mean about four increases of a quarter percentage point.   The word “normalization” is generally interpreted to mean “returning to about 3.5 percent”.

Lars Christensen has evoked the same principal:

Frankly speaking I don’t feel like commenting much on the FOMC’s decision today to keep the Fed fund target unchanged – it was as expected, but sadly it is very clear that the Fed has not given up the 1970s style focus on the Phillips curve and on the US labour market rather than focusing on monetary and market indicators. That is just plain depressing.

Anyway, I would rather focus on the policy framework rather than on today’s decision because at the core of why the Fed consistently seems to fail on monetary policy is the weaknesses in the monetary policy framework.

The FOMC is an Executive Committee that thinks it´s over and above criticism. It can never do wrong! But they also say that “we´re not responsible”. In fact, they sell themselves as having “The Courage to Act”!

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