And that isn’t a compliment. No, here’s Bullard jawing on about inflation as if it were the holiest of grails in this Bloomberg article that was published earlier today.
Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said lowering the unemployment threshold for a possible interest-rate increase would risk credibility when the focus should be on raising inflation.
If the jobless level can be moved, “then how much credibility do you have for the threshold?” Bullard said in an interview at “The Year Ahead: 2014,” a two-day conference sponsored by Bloomberg LP in Chicago. “That is what I would be most nervous about. It might be a dangerous game to move thresholds around.
I think what’s he’s saying is that the Evans rule should stand rather than lower the threshold for employment to 5.5% as Kocherlakota has proposed.
Here’s his proposal according to the article:
Bullard has instead proposed adding new guidance that the Fed wouldn’t raise its benchmark interest rate if inflation were below 1.5 percent, an idea he repeated today. Because the level would supplement rather than alter an existing threshold, the Fed’s credibility wouldn’t be sacrificed, he said.
This is just my opinion, but the Fed’s credibility has already been sacrificed because the premature taper chatter has already lead to questions about whether the Fed is serious about the Evans rule in the first place. There hasn’t been any justification for tapering based on economic variables – that is why with a little better than the same old jobs report, and only one report, not several good ones in a row, the markets start sinking. It doesn’t matter what the Fed says – markets understand that it’s touch-n-stop from month to month. Putting a floor on inflation won’t change that because as soon as 1.5% headline inflation is reached, blam! There goes the recovery – because the markets, and everyone else knows that the Fed isn’t even serious about 2%. What is the purpose of a 2% long run inflation target if it’s 1.5% instead and not even in the long run?
At minimum, the best answer with a long run inflation target is level targeting, meaning in the years inflation is too low, it’s made up the next year so that the long run evens out to 2%. At this point, the Fed would have to run as high as 3.5% for a few years to make up what it undershot the last 5 years. And it can still do that while keeping its credibility on the 2% long run target which would take it closer to being compliant with the dual mandate. I’ve never had faith that the Evans rule would cut it, and I still don’t.
But the reason there is so much confusion right now over the best approach to moving forward is because inflation is the wrong target for the circumstances, if not completely the wrong target – and doubly so if we’re talking about headline inflation because there are two sides to the AS/AD model and the Fed only impacts one side – demand. We cannot reduce the demand for food with monetary policy unless we can count on those people who lose their jobs in the resulting demand shock to also end up starving to death in a ditch. Some might think me melodramatic, but it really just goes to illustrate the absurdity of targeting headline inflation for which fluctuations in food prices due to natural influences are a major driver. And it’s close to the same story with energy – the less consumption comes from demand shocks – people becoming unemployed do use quite a bit less so everyone else can pay less at the pump. It is totally insane to pay less because there are so many jobless – and no one wants to think of it in that way – but that is just the way it is. And I can say from experience that it is contemplated much more thoroughly when it’s not happening to someone else.
These kinds of discussions going on STILL at the Fed, with the rather incoherent policy product still being produced, should be a huge red flag that these people do not know what they are doing and need to go. And the sooner, the better.
PS: If you like being annoyed, tune into The Economist Radio on Roku and listen to the briefing from Money Talks Monday
ndan “frothy markets” that “don’t match up to fundamentals…” Whatever that means. I swear these people can’t handle new types of investments being made in all sorts of places, as it should be, without seeing a bubble under every rock and bush. I had turn it off.