The Federal Reserve was created to provide an elastic currency and to be lender of last resort, primarily for the Federal government, and of these purposes, depending on the decade, it has not yet quite mastered them.
Case in point is public discussion about “transitory inflation” and what the term might mean. My opinion of the term, when used by central bankers, is that it does not refer to any specific generally accepted hypothesis or monetary theory, but rather is a statement of fact that, as an inflation targeting central bank, there is so much pricing noise coming from the supply side, monetary policymakers are effectively blind. With reopening going across the land, but not across the globe, supply chains are disrupted, and some production materials are harder to get, and labor is an issue, and so on… With all this happening on a scale likely never seen in modern history.
The term is Fed speak for “This too shall pass,” or better, “We are driving through the largest whiteout in history and don’t know where the hell we are.” Indeed, whiteouts are scary to drive through, and having blind monetary authorities is problematic in much the same way, especially when landing in this position is a choice rather than a necessity. They don’t have to do inflation targeting, the policy fair-weather friend, at best. Many people have been begging and pleading with the Fed to dump inflation targeting for the last decade, at least, for exactly this very reason – it fails when we most need monetary policy to do the heavy lifting of maintaining nominal stability.
The Powell Fed has done a good job with the tools they have to work with. I don’t mean to detract from that. But what is inherently broken is just that – inherently broken. The simplest form of explaining how inflation targeting is broken is this way: it’s all in MV=PY where the Fed directly controls only M, yet is trying to target P, when P and Y can spit in different ways depending, in part, on what is going on in the world. The result of adjustments in M is really a tradeoff to both P and Y while the split between them is unknowable, and unforecastable. Then, add the impact to V which, I think, is something momentous like a loaded freight train – so easy to get it into a feedback loop when Y is impacted and hard to reverse –especially when blind as a bat. It’s all simply for the goal of P ending up at some set-in stone, arbitrary figure that exists in hindsight. To hell with Y, past, present or future.
I care about Y more than I care about ½ of a percent or even a whole percent point movement of P – or perhaps even more. It’s a survival thing. Having a job versus no job or making some money verses making no money makes a huge difference in ability to survive. So why do we have a monetary policy that sacrifices income for stable prices when shit happens, and people need income more than ever? It’s a really messed up world to be stuck with this when we can instead rewrite the equation this way: MV=NGDP and forget about the impossible task of micromanaging P for the sake of humanity.
Like Trumpism, the IT addiction makes no sense to me. And yes, I believe there is a moral equivalence here. But I digress.
The Fed cannot “fight climate change.” It also does not need a crypto currency, which is contrary to its entire existence, and it certainly should not try to do this without getting a grip on monetary policy, unless it intends on never doing anything well. I think We, the people, deserve better.