An article with the title “Fed, ECB, and BoE Officials All Say They See Inflation Rising” appeared on Bloomberg today as report from the Jackson Hole central banker retreat.
It quoted Stanley Fischer as saying something really ridiculous:
Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said in his prepared remarks. “With inflation low, we can probably remove accommodation at a gradual pace,” Fischer said. “Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.
The first bold sentence in the quote is astounding. Remove accommodation with inflation low. Really? I must have woken up on an upside down planet. When inflation is high, it’s time to tighten. When inflation is low, it’s time to tighten. When, might I ask, is it time to ease?
Let’s take a look at this identity, MV=PY.
Money * Velocity = Price level * Income
For income, NGDP has averaged 3.5% since 2011. So far, for 2015, income appears to be on the lower side of the average. If inflation is around 1% for the year, that leaves somewhere slightly lower than 2.5% RGDP for 2015.
For Velocity, the graph from FRED shows velocity sinking at the end of the year in 2014 and going sideways this year.
And money… M2 growth from FRED shows as slowing since the end of the first quarter, and has been negative since the middle of April.
If this identity is any guide, as Milton Friedman thought so, Mr. Fischer needs to study a bit more because he seems quite confused about what his job is. If income is coming up short, and velocity is going sideways, and the price level is sinking like a stone, there is an indication that M is the problem. And which entity is in charge of M? Gee, I wonder.
I don’t really buy the lag thing, but just for the sake of argument, I’ll humor Mr. Fischer and say that there is a lag. If there is a lag, what these numbers are telling us is that the taper and the chatter about tightening happened too soon. M is not growing. And if M is not growing, then raising short term nominal interest rates is the last thing he and his colleagues should be doing if an average of 2% on the PCE index is the long run objective. It isn’t going to come out of thin air.
This thick as a brick, inflation-o-phobe mentality is so far beyond reasonable as to be harmful. It’s completely frustrating. Mr. Fischer needs to clean up his act or resign.