The following quote from former Fed Governor Mishkin is one I pulled off a recent blog post by Marcus Nunes where he talks about some highlights of the FOMC meeting minutes from 2007:
I feel strongly that the one thing a central bank can never afford to do is to lose its nominal anchor. If we do that, it’s a disaster. With that viewpoint, I should say that, if shocks occurred such that recession was going to occur and the only way we could stop a recession from occurring was to inflate the economy, we couldn’t allow that to happen. We actually have to preserve the nominal anchor because, in the long run, the pursuit of price stability is what makes good monetary policy and has been a key reason for the remarkable success of monetary policy by the central bankers throughout the world in recent years that I think nobody would have predicted.
Here is the text of the legislative mandate that was amended to the Federal Reserve Act by the Humphrey-Hawkins Full Employment and Balanced Growth Act which is still in effect:
[The Federal Reserve] shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
And here is the graph that I shamelessly lifted from another post by Mr. Nunes depicting how well the Federal Reserve has lived up to that mandate. Following Governor Mishkin’s advice, the Federal Reserve did indeed defend its nominal anchor from upward movement only from late 2007 onward, which had the effect of allowing nominal aggregates, particularly NGDP, to fall through a gaping expectations chasm in the floor. The NGDP gap, the difference between trend and actual, keeps growing larger as FOMC members fuss on about exceeding their coveted 2% headline inflation ceiling – output gap be damned.
I wonder what kind of “success” Mishkin thought central banks with this kind of policy experienced during nominal shocks of their own making. The Fed of 1929-32 that felt the need to defend its gold peg might be a pretty good example. Or maybe the Bank of Japan 20 years ago is a better one. In both cases, the central banks cared only of their anchors and pegs, not whether the financial destruction all around them were symptoms that perhaps the target was the wrong target for the needs of the economy. And here, Mishkin is saying that it doesn’t matter what other indicators of economic performance do; the only thing they should care about is not exceeding the 2% target, putting their credibility at risk.
Of course, we might be able to somewhat excuse the actions of the Fed from 70 years ago, as I am not convinced that the cause of the depression was well known and it did not have any legislative mandate other than to provide an elastic currency.
I’ve parsed the semantics of Full Employment and Balanced Growth Act in further detail here and here; and I can’t find anything about preservation of nominal anchors, Federal Reserve credibility or the priority of price stability above all else in it anywhere. In fact, the title of the Act pretty much spells out the intent; one does not have to actually read it to get the point that if anything in it was intended to be the priority of the Federal Reserve, it is in the context of employment and growth with price stability and interest rate modifiers. For the Fed to have a 2% inflation ceiling with no floor isn’t even price stability. Mr. Mishkin’s state of the world where there is no such thing as ultra-tight money certainly is not a pro-employment, pro-growth policy as we can see from the results it wrought on this country for the last five years.
I’ve given Mr. Mishkin the business for his lapses of judgment elsewhere on my blog. The only thing I think I could add to it would be that if anyone should be held up as an example of the failure of big government, full of technocrats who believe they are above the law, it is Mr. Mishkin who was so smitten with himself and his own ideas that he forgot where he put his specs when it came time for him to figure out what his job really was. His advice was unlawful; and he seems to have gotten away with the crime of the century in being the one person likely most responsible for the economic collapse that started in late 2007 and all the misery that flowed from it.
PS:A video from August 2007 posted by Scott Sumner