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Fed Keeps Missing Targets, Plans to Miss Them for Years

Over the past few days, members of the Federal Reserve Board of Governors have begun to prepare the ground for another round of monetary easing. The arguments for this are simply that unemployment is coming in above target, and inflation below target, so in order to get back on track, the Fed must act. That’s basically what San Francisco Fed chair John Williams says here:

We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates […]

If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. These purchases have proven effective in lowering borrowing costs and improving financial conditions.

That means another round of quantitative easing, with the goal of increasing econmic activity and job growth. But it’s not entirely clear that previous QE approaches have accomplished this. Unconventional monetary policy, like setting a higher inflation target or using the communications channel to announce a different measure of targeting (targeting nominal GDP, for example), appears off the table. Only Chicago Fed President Charles Evans even contemplates a higher inflation target.

The reasons that Fed policymakers give for not acting usually fall along the lines of not wanting to risk their hard-earned credibility on price stability. But as Justin Wolfers and Betsy Stevenson argue in Bloomberg, Fed credibility means nothing when they constantly miss their own targets:

Right now, the Fed’s preferred measure of inflation — the deflator on personal consumption expenditures — is less than 2 percent, with the most recent estimate showing an annual increase of 1.5 percent. And unemployment remains at 8.2 percent. If monetary policy had been used more aggressively to combat the recession, then unemployment would be lower and inflation would be closer to its target. Even if you believe monetary policy is largely ineffective at lowering unemployment, a more expansionary policy would still have pushed inflation closer to its target.

Worse, these projections are based on an expectation of “appropriate monetary policy.” That is, the Fed thinks it’s appropriate to run policy in a way that it expects to fail to meet its stated goals for the next few years for no discernible reason. Beyond the macroeconomic failings, the Fed has also botched its goal of being transparent in explaining what is driving its policy decisions […]

The point is that the Fed’s usual excuse — that it’s hard to nail two goals with just one instrument — doesn’t apply. In normal times, the debate over monetary policy is between “hawks” who want the Fed to emphasize its inflation target, and “doves” who want it to focus on lowering unemployment. But there’s no debate here — more accommodative monetary policy would help achieve the goals for both inflation and unemployment.

You can only come to the conclusion that for the Fed, inflation is not a target but a ceiling, and anything below that target is acceptable. Only by assuming that the Fed believes it is accomplishing its price stability goals can you conclude that they’re something other than sadists.

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David Dayen

David Dayen