A few times in my life I’ve caught myself being awake, but my mind was off in another, more peaceful and pleasant world. I’m not a dreamer. I didn’t know the experience of a real daydream until a few years ago when it just happened; I had almost no awareness of things going on around me. When I snapped out of it, I felt a small sense of loss.
In the Fed’s FOMC minutes for July, I see some small measure of the glimmering good ship lollipop. For example, when recounting policy conduct during the time when the “Great” was put into the Great Recession, it says this:
Staff briefings provided a retrospective on the Federal Reserve’s monetary policy actions since the financial crisis, together with background and analysis regarding some key issues. In its policy response during the recession and the subsequent economic recovery, the Committee lowered the federal funds rate to its effective lower bound (ELB) and provided additional monetary policy accommodation through both forward guidance about the expected path of the policy rate and balance sheet policy. These actions eased financial conditions and provided substantial support to economic activity; they therefore figured importantly in helping promote the recovery in the labor market and in preventing inflation from falling substantially below the Committee’s objective.
The PCE inflation graph I found on FRED tells a slightly different story about how far from the implicit target inflation actually “drifted”. Memory of events described in the 2008 FOMC meeting transcripts about what happened when, such as emergency bank lending sterilization operations, implementation of IoER, and a few other sorts of inconvenient truths about policy conduct during that period that I am sure nearly everyone would like to forget. A policy review sans the really ugly stuff address nothing in particular in an optional way – because one cannot solve a problem if one doesn’t know what problem they’re solving.
And really, only in the soft, warm and fuzzy world of a daydream bad medicine can actually a be good thing, and can you tell the entire world you will repeatedly fail the one and only job you have – and not get fired – such as here:
These changes included the long period during which the federal funds rate was at the ELB, the probable recurrence of ELB episodes if the neutral level of the policy rate remains at historically low levels, and the challenges that policymakers face in influencing inflation and inflation expectations when the response of inflation to resource utilization has diminished. Participants generally agreed that the Committee’s consideration of possible modifications to its policy strategy, tools, and communication practices would take some time and that the process would be careful, deliberate, and patient.
With regard to the current monetary policy framework, participants agreed that this framework had served the Committee and the U.S. economy well over the past decade. They judged that forward guidance and balance sheet actions had provided policy accommodation during the ELB period and had supported economic activity and a return to strong labor market conditions while also bringing inflation closer to the Committee’s longer-run goal of 2 percent than would otherwise have been the case. In addition, participants noted that the Committee’s balanced approach to promoting its dual mandate of maximum employment and price stability had facilitated Committee policy actions aimed at supporting the labor market and economic activity even during times when the provision of accommodation was potentially associated with the risk of inflation running persistently above 2 percent.
Didn’t they just get done telling us that, among other problems controlling inflation (though they never really tried because it doesn’t just happen), the inflation target is too low to effectively peg short nominal interest rates? And I was truly under the impression that a disinflation, whether intended or accidental, isn’t price stability. But being patient and thorough in not addressing anything in particular is the best medicine there is when “… regarding the current monetary policy framework, participants agreed that this framework had served the Committee and the U.S. economy well over the past decade.” Nothing more to see here, folks. Move right along…
Why can we not have a constructive and honest discussion about how we get to the ELB and how we can prevent such episodes? We need one because an once of prevention is worth a ton of QE. It doesn’t just happen.
During the very few and fleeting daydreams in my experience, the real world usually comes knocking. And of course, because I was off in my other world, I’m not ready for it. Unfortunately, neither will the FOMC be ready when they can’t seem to tell the sober (and sobering) story about the occasion of the ELB and FOMC’s implementation of QE in this decade and accompanying opportunity cost in the management of it that’s still felt, or the problems with a microscopic inflation ceiling in accommodating reallocations, and what that means to average working class people even today.
This issue of FOMC meeting minutes is probably the saddest advertisement for FOMC independence ever.