Some might find statements made by Atlanta Fed’s Lockhart as reported by Bloomberg.com encouraging. But I find them depressing for the simple reason that they demonstrate that the irrational inflation target of 2% in a very narrow time frame still controls the making of Fed policy instead of more appropriate measures of economic performance and nominal stability, like NGDP.
Here’s Mr. Lockhart:
“I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time even if fiscal cliff issues are properly addressed… Fed easing isn’t aimed at “abetting” fiscal policy by reducing the cost of financing the federal deficit…
“It’s possible to get to a threshold number for unemployment as long as we present it as indicative of a broader evaluation [of labor-market conditions]… We are likely to have to begin to tighten before we get to full employment… So I am more comfortable with one of the interim target numbers, say 7 percent, conceivably 6.5 percent [as the unemployment rate threshold]. “
What would be the theoretical basis of having to tighten before getting to full employment? I wonder. And if he supports easing through a period that is defined by specific economic performance, what would be the point of tightening prematurely? It doesn’t make a whole lot of sense unless considered as still obsessing about inflation.
Additionally, I believe that the assortment of statements made by various FOMC members is adding to uncertainty rather than clearing it up as they disagree on the particulars of the goal of easing or when policy might be “firmed”. They could clear all of that up by announcing a policy that is linked to NGDP growth, either returning to trend or to some degree toward it rather than insisting upon what seems like an arbitrary measure of inflation. I think the current approach is wrongheaded given that the price stability mandate is given in the context of the long-run rather than per year or some other short term basis. They haven’t dealt with the issue of undershooting the inflation target in any sense of the imagination; and it is necessary to do so if they still wish to talk in terms of inflation and be believed that they are serious about reducing unemployment. Otherwise, they are communicating that nothing has really changed and if the bottom falls out of inflation expectations, they will still be obsessing about the 2% target which, in the context of the long-run, is inappropriate after a bout of deflation followed by years of undershooting the target by .5-1%. Sorry, guys; but that isn’t price stability.