Looking for competence in central banking? Well, the news of the day has left much to be desired, starting off with the tried and true to fail approach to QE attempted by the Federal Reserve in the QE programs 1 and 2 with a quantified target stunningly pushed forward by Draghi as he unveiled EZ QE of around a trillion or so euros sans any economic target, time span, or anything else.
And to top it off, on CNBC was a story about how Yellen and Fischer have an issue with the unemployment and inflation rate thresholds included with the forward guidance announced just after the start of the QE 3 program, favoring greater discretion of the current FOMC over being saddled with forward guidance from the past. Of course, I agree that the economic targets given with QE3 were not the best targets. But that’s because they were the wrong ones, not because forward guidance is bad. In all actuality, the only forward guidance a central bank should need is well defined and communicated nominal target and reaction functions, the stuff that means more than words blabbered at news conferences and is backed up by action. This is our level target. This is what we will do to meet and sustain the level target. And every time they see a potential to drift off level, they do something about it and keep doing it until the job is done. No dithering. No hemming and hawing. No stewing about bubbles and gigantic balance sheets, shaking in their boots and hiding under the desk when there is a nominal stability job to do.
Yellen and Fischer find themselves in a tight spot (pun intended) with another negative nominal shock in progress because they haven’t been able to convince anyone the inflation target matters after the Bernanke Fed spent YEARS letting bygones be bygones, asphyxiating the future economy with central bank failures of the past. They can’t get out of this with discretion because discretion is what got us into this. Without the proper rules that ensure makeup from those past failures and future nominal stability, we’re stuck riding the chaotic tight money panic and volatility rollercoaster straight to hell.
As much as I’ve criticized Yellen and Fischer in this post, however, I have to give them credit for at least trying to do something about the nominal problem that is currently brewing. It proves they aren’t hard core sadomonetarists who jump for joy when their currency dramatically appreciates.
But I don’t really understand what they’re doing and why it is so hard to at least try NGDPLT or at the very least PLT when nothing else has worked. I don’t get why we have to keep suffering through trying everything else first only to have it all fail, and I probably never will.