Walk it Back

In simpler times the Fed could configure a forecast of future activity and inflation and fine tune policy toward that objective. When Bernanke and Co. shifted to a monetary (quantitative) regime we worried that they did not establish a robust compass to steer by. Volcker's focus on the M's now had 25 years of scrutiny. "Credit easing" was the original faux metric. A randomly selected size of the balance sheet was next.  Now, Nominal GDP, inflation and unemployment targets are being discussed. The process need not be this confusing.

The Fed forecasts for growth and inflation are not tracking reality. If the objective is to target the forecast, then some additional action is warranted. The alternative would be voicing strong language that the projections were still intact. The Fed has opted for a sketchier, allegedly more flexible, approach. Pilots call it flying without instruments. Thus, as the minutes of a contentious 3 dissent meeting were released, Fed spokesmen were trotted out in various formats to "walk back" the difference of opinions.

Central Banks are, by definition, domestic institutions. That Europeans failed to realize this should not deter the Fed from its mission.  Bernanke must long to deliver the Col. Jessup line to critics (paraphrased): "You sleep under the blanket of protection that I provide then challenge the manner in which I provide it. I'd  prefer you just say thank you and go about your business." The bottom line is all too obvious. The hoped for growth path, marginal as it was, will not be achieved. In typical Pavlovian fashion, more stimulus is dialed up. The consequence is loss of efficacy. We think the 2 day meeting should set a hard target (unemployment rate out) and adjust or hold policy to achieve it. The rest is theater.

4 thoughts on “Walk it Back

  1. rwmakedance

    In my humble opinion, the Fed has done what it thought would work. Does anyone out there think that the Fed can fix “humpdi dumpdi”(sp?)—My view is only a lot of time will put “HD”
    back together again.(look at Japan, didn’t its 5-6 top leaders in the last few years try to fix their economy? Some things are too complex to fix right away. I fear the USA is in that mess. Let’s hope I am wrong. So, the only thing left for Obama is try to get elected again with a high unemployment rate. How can he do this? Yes, show some progress and blame Republicans for the rest of the problem.
    A possible tactic??

    1. kevin Post author

      Agreed. The Fed bashers criticize policy as failed but QE doesn’t “do” what they think. This will be with us for some time. Fiscal Austerity is gaining traction at a dangerous time.

  2. Ivan

    Why do most people believe that the discussion of central bank policy is ok to have in a vacuum, devoid of any interaction with the fiscal policy variable? While I realize that the Fed is “independent”, and that fiscal policy-setting is, these days, an unpredictable process, it is still the case that the combination of the two need to be analyzed together. If we had perfect certainty over the actions that congress will take in the next several weeks regarding short-term stimulus and long-term deficit reduction, wouldn’t you be analyzing the Fed’s actions in the context of the fiscal response?

    To further channel Col. Jessup: “You need me on that wall. I need to know who else is on that wall with me.”


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