Yesterday I posted my gut reaction to Yellen’s admission for the Fed on overestimation of inflation and the fear involved in it. Since writing that post, her speech has been drifting through my thoughts and I realized that I had overlooked some important points.
I can’t say that I have any clue what of the experience is to be a central banker, let alone the chief central banker of the Federal Reserve. Being a mere mortal has its limitations, and I am sure that these limitations are felt profoundly on a daily basis in that regard.
As an authentication engineer for a fortune 100 firm, however, I am no stranger to doing my job under the pressure of high stakes risk from engineering project to engineering project. One directory, god-like credentials, and one wrong setting can spoil the broth and cause the whole thing to go down in various degrees of broken, some recoverable and some not so much.
Yet with the degree of risk involved in this job, with appropriate preparation, it is manageable and so are my feelings toward it. Having experience helps a lot. But even with that, some projects seem to inspire a greater amount of anxiety than others. Over the years I’ve had to train myself to ignore the anxiety I feel even after a given project has been through testing and plan B has been tested and readied because it’s got to get done and there isn’t anyone else (plus the paycheck continuation plan is quite an incentive). The stress at that point just doesn’t matter. What does matter is whether I did the best job I could do and every command and mouse click is documented.
With this in mind, as I was thinking about the reasoning behind the conservative bent in monetary policy at the Fed, I was trying to rationalize the fear, wondering what there is to be afraid of in a general way and, if the emphasis on the target being symmetrical is in any way valid, why is persistent below target inflation not a greater fear simply for the consequences.
I’ll start with this by taking a look at the mandate. It is contained in one sentence separated by a modifier, with the first part below.
“ [The Federal Reserve] shall manage monetary and credit aggregates commensurate with the economy’s long run ability to increase production, …”
The way I read this is: We’re going to print ‘em up and our enterprising citizens both young and old will borrow them and go build productive means with them, and produce things that people want until we can’t anymore.
Then the second part of the mandate comes along and adds modifiers because, if left alone, doing just the first part would eventually get out of hand; and while the mandate is intended to provide the means for productive capitalism, we also need some sense of stability:
“… so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
This is quite different than the oft selective interpretation of the mandate we’ve heard. But a standard rule of construction is to interpret a clause of a section of a document (in this case just one complete sentence) as to provide contextual meaning to the whole – and this did come from the Full Employment and Balanced Growth Act not the Keep Inflation Under Control At All Costs Act.
So which mandate effects has the Fed been delivering according to their own confessions, those from the Full Employment and Balanced Growth Act or the imaginary Keep Inflation Under Control At All Costs Act?
It’s easy for me to say. Really. I am sure it’s much harder to do for reasons of which I am unaware. But the one thing that I do understand is the general concept of the rule of law and a legislated mandate in front of me that, as written, doesn’t provide a whole lot of room for inflation level obsession as if it were written for and by those with a more practical utilitarian bent.
This mandate isn’t about inflation. It’s about practical utilization of a public resource for the public good of having available ample means of survival in a somewhat stable atmosphere. Doing too little to foster the first part of the mandate is where the huge opportunity cost lies, and slaving to a Fed constructed 2% inflation ceiling as to sacrifice both employment and stability is simply not in the legislative language, or what would I call the Fedster job description, at all.
People like Esther George may not agree with the law, but I don’t believe she was in congress when it was debated and passed. Disagreement with the law, however, does not provide the latitude to disregard both the letter and spirit of it. The threat of too high too fast as a remedy for some perception of too low for too long simply has no legal basis, and I’d say that if that’s what the Fed intends, then the law needs some really humongous teeth in order to instill some more appropriate fear.
As a side note, in Bloomberg today there was an article about the impact of the economic crisis in Venezuela on some of its citizens that outlines dramatic weight loss from employment, food and cash shortages since the crisis began. I read it and seemed vaguely familiar. I won’t rehash the details of how it is familiar here, but I wondered where Bloomberg was for unemployed Americans during the Great Recession.