Most people would look at a 40-month deviation as being rationally altering, maybe even something so permanent. The Fed, on the other hand, along with economists, have convinced themselves that somehow three and a half years is but a temporary detour. And so monetary policy and the recovery outlook itself are supposed to somehow straddle that inconvenience while still emitting the smallest plausible specks of credibility for ‘markets.’
We start with several suppositions that in an academic setting are perfectly reasonable and complimentary: the Fed can ‘print money’; money printing amounts to ‘more money chasing fewer goods’; ‘more money chasing fewer goods’ means rising prices; rising prices mean workers ask for wage increases; wage increases are inflation; inflation is a recovery and fully functioning economic growth period. Not only is the 2% inflation target indicative of that on the upside, it is also suggesting that the Fed can, by turning off or fine-tuning the ‘money printing’, stop inflation at or around their 2% threshold should it have been all so workable.
But none of that actually takes place, especially the money printing part. In fact, all of that is a fairy tale that the ‘market’ simply believes can be the case if the Fed is ever so challenged. As long as the Fed holds out such credulity that if it was forced to do so it could, the ‘market’ should do the Fed’s work in a manner consistent with the 2% inflation target. It really does hinge upon that and nothing else.
That is why Janet Yellen is so absolutely sure (well, she says it but her renditions have become much less harmonic over time) that long run inflation expectations are anchored at 2%. When she makes that claim what she is saying is that she still thinks the market believes the Fed holds the ‘money printing’ power unchecked by resolve. Like the illusory great Wizard of Oz, she could display the outlines of such fury but only if she really, really has to.
This post was published at David Stockmans Contra Corner on October 10, 2015.
Recent Comments