In response to an FT article by Martin Wolf on 20th June 2017, entitled ‘Janet Yellen and the Fed’s inflation target should both stay’
“The Federal Reserve is ahead of other important western central banks, in normalising monetary policy. This has provoked lively debate. Prominent questions are whether the Fed is wise to proceed with its tightening and whether it should change its inflation target. A third question is also under discussion: should the president replace Janet Yellen as chair when her term expires in January? The answers to all three questions are: no…
…If Mr Trump wishes to take a small step towards establishing a reputation for judgment he should reappoint Ms Yellen. At a time of turbulence, this is no time for radical new departures. Let the Fed nurture the recovery the US and, for that matter, the president need, under Ms Yellen’s leadership” – Martin Wolf
I think the Fed has hit its inflation target just once in the past five years; and yet at almost every meeting we hear the word 'transitory'. All the unfortunate statistics are 'transitory'. The only thing transitory is the Fed's grip on reality. Here is what Janet Yellen said when challenged on inflation at the press conference last week:
“So, I don't think central bank credibility, at least the Feds' credibility has been impaired. We look at a whole variety of indicators of inflation, expectations, professional forecasters, whether it's in the blue-chip or the survey of professional forecasters, those expectations have remained quite steady and in close alignment with our 2% inflation target. TIPS based measures of inflation compensation do not provide straight reads on market participants' estimates and expectations about inflation. They embody other elements, risk premia and liquidity premia as well. They had moved down and now have moved- they remain at low levels. But they have moved back up again. It is true that some household surveys of inflation expectations have moved down, but overall I wouldn't say that we've seen a broad undermining of inflation expectations”
If she’d have dropped her first four words, that initial sentence would have been a welcome confession…central bank credibility, at least the Feds' credibility has been impaired... which at least would have been true ...but she rambled on with the pretence that everything is OK, torturing the English language as she went along, to arrive at what amounted to this:
“No don't look at that figure...look at all these other figures I've got for you...trust me, I’ve got lots of very clever people who agree with me...actually everything is going according to plan"
Any organisation that is struggling to achieve its goals is highly unlikely to turn things around until it starts telling the truth about the current reality. Alas the Fed doesn’t do ‘the truth’ - they rationalise away past failures, in order to avoid responsibility for the consequences of their decisions...and then provide ‘flannel’ to reassure the world of a rosy future.
Whatever subject they discuss, they show very little awareness of the effects of their own actions. For example - they've held interest rates at zero for the best part of ten years, despite being warned by people who live in the real world that this would incentivise CEOs, who are tasked with providing a return to shareholders - to raise EPS by buying back shares using debt, rather than make capital investments. I.E. the Fed were repeatedly warned, including by many of us here in your comments section, that the effect of ZIRP would be to channel funds from long term investment, to short term survival. That's exactly what has happened. And yet, when any of those geniuses talk about 'productivity' they talk about 'the productivity conundrum'. The only conundrum is why we put up with such an incompetent bunch of nincompoops.
On a lighter note, if there are any Martians reading this who are wondering why inflation is so important - it's because governments need to devalue their old debt, in order to continue to take on new debt. On Earth, no system of legalised theft from citizens is honourable without the absolute necessity to do more of it in order to protect them from the effects of governmental collapse. Stealing from people when it is not in their best interests is considered immoral.