Ben Bernanke uttered the word taper in 2013, signaling that quantitative easing’s days were numbered. No one knew how the Fed would escape from years of QE and near-zero rates. But to her credit, Yellen accepted the challenge in late 2013.
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We’ve Entered A Period Of Maximum Monetary Uncertainty
She tapered the Fed’s bond buying down to zero (except for reinvestment of dividends and maturity rollovers) and began the rate-hike cycle. But that hasn’t normalized interest rates.
Another objective Yellen hasn’t achieved is to create enough inflation. It is part of the Fed’s job to keep inflation at an acceptable level, which it defines as 2%. This mandate is articulated in the Federal Open Market Committee’s “Statement on Longer-Run Goals and Monetary Policy Strategy.”
The Fed itself says monetary policy determines the inflation rate. The Fed determines monetary policy, so inflation (or lack thereof) falls squarely in their laps.
That is quite a startling statement, if you think about it
The Fed Has Failed to Achieve Its Key Goal
The Fed doesn’t just regulate inflation; the Fed causes inflation. It’s not a side effect but a deliberate one. And they admit doing so, right in their own documents.
But wait, there’s more.
The Committee would be concerned if inflation were running persistently above or below this objective.
PCE inflation has lagged below 2% for years now. The Committee reminds us at every meeting that it is, in fact, concerned about this. But its concern has not stopped it from pursuing policies that produce everything but inflation.
The point here is that, by its own self-imposed goals and definitions, the Fed has failed to accomplish a key part of its mission.
It wants 2% inflation. It says its policies can create inflation, but those policies haven’t. This is failure by any definition of the word.
Is the Fed Really in Control?
Let me make another comment on the section that I bolded above: “The inflation rate over the longer run is primarily determined by monetary policy…”
Really? If inflation or deflation is primarily determined by monetary policy, why is there no inflation in Japan today? And why hasn’t there been for 25 years?
With the most massive quantitative easing and the lowest interest rates ever seen, Japan has gone to great lengths to create inflation. But it hasn’t worked out.
The West is no different. Some of the same conditions (demographic and market) that have foiled Japan apply in the US and Europe. And I suspect the Fed’s efforts will be as futile as the Bank of Japan’s have been.
When a person or an organization fails—and of course we all do—the best response is to show some humility, identify the problem, and modify the strategy. The Fed is doing the opposite.
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