If you really want to read the statement you can find it here. Aside from a tiny bit of word-smithing there’s nothing in it we didn’t already know. The only thing different about it is that the longer this talk of tightening (when they’ve already effectively tightened) with inflation heading down the hole goes on, the more absurd it becomes.
Bloomberg did a quick comparison of forecasting among different major central banks of the world, I read it quite a while ago and will have to find it again for reference, and the Fed was in the last quintile of accuracy, meaning that its median estimates were correct less than 50% of the time. Now, I am not particularly sure how the Fed managed to beat the odds. Simply flipping a coin would be more accurate. And nobody has been fired. So where do I sign up for that job? I’ll just whip out my special mint Thomas Jefferson dollar coin and get right to work on improving the accuracy of Fed forecasting; though I suppose one of those zinc pennies would do in a pinch.
Seriously, though, with that kind of reliability rating, I am astounded that any of the policymakers at the Fed have any certainty that sending signals of tighter money to come, let alone acting upon it, is the right thing to do. I suppose it all depends on what they believe is the better condition of error. To err on the side of tight or on the side of easy. Having learned a painful lesson from the crash of 2008, I could think of plenty of reasons why erring on the side of tight is a really bad idea while erring on the side of maybe actually hitting the target or a bit above would hurt a lot less. Of course, who am I kidding? It’s not like they really care about the people they serve. Perhaps some harbor dreams of being on the cover of The Atlantic with the caption “Our Hero”, and being heralded as the savior of the financial system with few having a clue as to the nature of its demise.
I can recall all the harping on central bank credibility back in 2009-12, supposedly one of the reasons the Fed did not pursue a more appropriate policy stance during that period. And now I am thinking that it really has lost credibility in controlling inflation in whichever direction. So why can’t they either figure out how to live up to the chosen target and get serious about it or can the whole ridiculous inflation charade? It can’t be so hard to tell the truth – we tighten because we WANT to not because the economy needs it. It doesn’t matter if wages are rising or not, or whether productivity is falling. Nothing matters.
Oy! So here do I sign up for that job where nothing matters, I get a limo ride to work every morning and my very own police force at my command? Talk about punch bowls and extravagance… If the Fed is really that conservative of an institution, they should all self-deport.
PS: One other thing I have in my bag of tricks tonight is this David Beckworth post on monetary offset of changes in fiscal policy in Canada. The posts is accompanied by a really nice graph of Canada’s period of austerity in which the Bank of Canada PERMANENTLY expanded the base to offset. Now, just suppose that the purpose of QE3 was to offset the changes in fiscal policy. What happens then, when that offset is NOT permanent – as we can pretty well surmise to be the case in the US with policymakers in quite a rush to shrink the balance sheet to more “normal” levels? So yeah. What happens when they undo QE3?