So Loretta Mester of the Cleveland Fed didn’t say employment is what monetary policy is all about. But I wonder what other kind of implication any logical minded person could draw from the information contained in this article that was posted on CNBC on Thursday:
Echoing themes expressed by her colleagues recently, Mester said she still sees the long-run path of inflation meeting the Fed’s goals. That’s despite a harrowing bear market in oil that has caused spillover damage into the stock and bond markets as well as corporate earnings.
She -acknowledged the decline in energy prices and net exports among other weakness in the economy. However, she also noted “solid labor market indicators, including strong payroll growth and healthy growth in real disposable income” that “suggest at underlying U.S. economic fundamentals remain sound.
But with the labor market trending toward full employment and worries growing over excessive risk taking, the Fed has been trying to normalize. The December hike was met with a sharp round of volatility, and market projections for the future path of rate hikes have diminished significantly.
However, she said market participants still should expect the Fed to continue on a tightening path, albeit a slow one.
I see the long-run path of inflation meeting the Fed’s goal’s too. But in the long-run are all dead. And so, I am not sure of the relevance of her point regarding the Fed’s price stability mandate. Everything else looks bad: markets, manufacturing, inventory, spending, and the only thing she has to point to is employment – a lagging indicator. What is she going to say when unemployment starts to climb? It’s oil. It’s whatever other industry happens take the biggest hit next to oil. They are already baking that excuse into their propaganda to explain missing the target.
I can’t even be sure what planet she is on when talking about strong wage growth. We had much stronger wage growth in 2013 and we were doing QE!
There might be a case to be made in the view of mainstream economics that a central bank can’t be expected to meet its definition of price stability at the zero bound. I don’t agree with that premise for all kinds of reasons, but that’s what I have heard. Now that the Fed is no longer at the ZLB, however, sinking inflation expectations, NGDP, every other economic indicator, and with them realized inflation is a bit of a puzzle. It’s even more of a puzzle how tighter money will do anything to bring the Fed into compliance with its mandate of full employment and stable prices.
More puzzling yet is how Ms. Mester can approach the public this way without being challenged at the very least. I happen to think a discussion such as this should be greeted with at least the punishment that was meted out to Beckworth and Ponnuru. At least those gentlemen made sense. But unlike them, Mester deserves to be embarrassed over tortured logic and implied exclamation that the Fed can take such a long time to comply with the Federal Reserve Act mandates that the mandates might as well not exist. Of course that is just my opinion born out daily frustration over policymakers who speak as if they have gotten their PhD’s out of a grab bag at a carnival.