The stated inflation target for the Fed is 2%. That is the ceiling and there is no floor. Once inflation starts to fall, it can fall just about anywhere because there is no policy for preventing it or for providing a remedy. That is why this recession became so severe and why it is still here. The Fed passively smashed the economy with a sledge hammer and has been watching the deflationary gyrations, supposedly with a commitment to do something at some point (though no one knows what or when, or based on what set of assumptions) as it tumbles down the bottomless pit of Great Depression economics.
The light came on in my head when someone had posted a comment about Bullard, the President of the Federal Reserve Bank in St. Louis, arguing that there is no output gap. It’s true that it is difficult to measure, like velocity. But it is really shocking that we can make assumptions about when velocity is falling and he makes such an absurd statement when the rate of employment is the lowest it’s been in 30 years, together with the other indicators of contraction like bankruptcies, defaults, and depressed economic activity. It is so sad that with the unemployment rate falling because people are giving up (pretty inarguable according to the math), the Fed believes it is doing a good job, even though evidence to the contrary is nearly everywhere we look.
Forget about the full employment mandate, because it doesn’t even really matter. I think we need to talk about the price stability mandate instead because these guys at the Fed insist that if they pay attention to only that, all the other mandates will fall into place. Um, not without a damned floor on the target they won’t!
I would really like to see Bullard and Lacker argue that there doesn’t need to be a floor on monetary policy, no remedy for undershooting, and show us how accepting variability in inflation, toward deflationary gyrations, is meeting the price stability mandate. I dare them to come out and tell us that downward 1% to 1.99% variability in inflation doesn’t matter and not having any plan for dealing with it is consistent with the price stability mandate. They can’t argue any such thing because it is economically damaging and not consistent with the price stability mandate. It isn’t even consistent with the “low and stable inflation” rhetoric these guys have spewing as it if means something important.
I certainly hope we get over this episode of the emperor’s new clothes very soon. These Fed guys are full of crap and I can’t think of any worse place to have guys that are full of crap in power than the Federal Reserve.