In the media, news about the January ’16 FOMC statement last week was more or less non-news. Nothing more to see here, folks, move a long…
Of course I took the reports about the statement, that there was nothing new to report at face value and haven’t looked at it until today. After all, even though I expect responsiveness out of public servants, I’m with the program that FOMC members don’t seem to agree with me and will do what they will do no matter the fallout. But after reading the statement, really what I think the reports about the statement should have said was that there was no backtracking and no new rate hikes because there were some new things in it, some bad new things.
The first paragraph, third and fourth sentences:
A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
The two-percent objective has now gone from a medium-term objective to a “longer-run” objective partly reflecting all of the stuff that shouldn’t be included: energy and imports. For an institution filled with inflation nutters, you know, inflation is always and everywhere a monetary phenomenon, they sure settle for any excuse available for missing their official target.
It’s a bit surprising that this isn’t pointed out for the kind of evasion tactic that it is. Because if the supply side is global, which is alluded to here when the blame is pinned on imports, then Phillips-curve kind of thinking can only be a very dated relic, at best, and any rationalization of monetary policy actions based on it are simply incorrect.
What we are seeing here are policymakers in denial that inflation targeting is obsolete, with scant rationale that tighter money is needed; and as a result, instead of reexamining priors and recalibrating policy to a more appropriate nominal target, they simply extend the timeframe by which to meet the target to a timeframe when we are all dead. Surely, continuing down a tight money path with flimsy, dated, Phillip’s curve rationale means that, yes, if everything continues down the expected course, we will all be dead by the time the Fed hits its price stability target (if ever). And, if I had to guess, economic conditions will get much worse before they get better.
Japan’s unemployment rate is somewhere around two-percent. It is also experiencing sub-one-percent inflation on a persistent basis despite doubling of the money supply, and doing it again. So maybe that particular phenomenon should be explained in the context of the how the Fed defines full employment before I conclude that perhaps it is more arbitrary than appears on the surface.
PS: Janet Yellen and Stanley Fischer should be fired for incompetence.