Federal Reserve

The Fed Has Failed In Its Inflation Mandate

March 15, 2022 By Jack Salmon 5 Comments

The Consumer Price Index (CPI) measure of inflation clocked in at 7.9 percent for February, marking the highest level of inflation since January 1982. At this rate, consumer prices will double roughly every nine years.

The increase in prices includes many everyday consumer staples. The price of gas in February was up 38 percent since last year; utilities were up 24 percent, and steak and bacon were up 17 percent. Many clothing items were also up by double-digit percentages.

If we can learn anything from this, it is that the Federal Reserve has failed abysmally in its efforts to maintain low and stable prices.

Since 1977, the Federal Reserve has abided two distinct goals, known as its dual mandate. The first is to maintain a low and stable price level. The Federal Open Market Committee (FOMC) considers a 2 percent annual change in the inflation rate of Personal Consumption Expenditures (PCE) — the Fed’s preferred inflation measure — to be consistent with its goal.

From 1990 to 2019, the rate of inflation for PCE averaged 2 percent and rarely exceeded 3 percent.

Then came 2020.

At an economic symposium in Jackson Hole, Wyo., in August 2020, Federal Reserve chairman Jerome Powell announced a fundamental shift in the Fed’s dual mandate — away from a 2 percent target and toward a goal of average-inflation targeting. This change amounts to running inflation above target for some time to make up for the below-target inflation of prior years.

The justification for these changes was largely based on the concern that below-target inflation would lower interest rates, diminishing the Fed’s ability to boost employment — the Fed’s second mandate — during economic downturns.

In addition, the Fed and its regional banks have been increasingly advocating progressive goals such as a focus on race, ethnicity, and gender when determining employment objectives.

A forthcoming research article from the Independent Institute finds that Federal Reserve economists are increasingly driven by political activism and affiliation; they also demonstrate a growing preoccupation with politically charged topics such as climate change, discrimination, and economic inequality. These goals add more pressure on the Fed to maintain accommodative monetary policy, even as inflation spirals out of control.

Perhaps this provides another explanation for why the federal-funds interest rate is still at zero and the Fed is still engaged in quantitative easing after eleven consecutive months of the annualized CPI running above 4 percent.

When outlining its average inflation target in 2020, the Fed kept the details of its new inflation goals very vague — perhaps purposefully so. Jerome Powell noted that his aim was to “achieve inflation moderately above 2 percent for some time.” The problem here is that no one truly knows how much and for how long the Fed plans to run inflation “moderately” above that mark.

No one actually believes that the Fed planned to run PCE inflation at 4 to 6 percent for a year or longer, yet that is exactly where we are heading. Even if we look at PCE inflation averaged over two years, to avoid base effects, average inflation is running at close to 4 percent and has been above the Fed’s 2 percent target since April last year.

When economists were polled in December 2021 on their inflation expectations, most believed that peak inflation had already passed and would return to the 2 percent trend by the end of 2022. Yet many of these same economists have been falsely forecasting peak inflation for almost a year. Somehow peak inflation keeps being pushed back.

A variety of mostly supply-side excuses have been offered to explain away what many saw as “transitory” inflation. These included high lumber prices, base effects, demand for used cars, drought in Taiwan, and broad supply-chain restraints. Yet even Fed chairman Powell retired use of the term “transitory” after realizing that inflation trends were proving to be persistent and at levels well above expectations.

There is a missing piece to this puzzle — namely, demand-side factors. Yet after 14 years of accommodative monetary policy and unprecedented increases in government spending, we rarely hear Fed officials talking about them.

Click here to read the full article at the National Review

Fed’s monetary policies stoke income inequality

June 7, 2015 By Mike Gatto 2 Comments

Income inequality has been in the public consciousness recently, causing policymakers to redouble our efforts to remediate poverty and preserve what is left of the middle class. But aside from a small group of contrarian economists, few people, and most certainly few policymakers, have been willing to discuss the primary cause of income inequality in the last generation.

When Congress created our central bank, the Federal Reserve, its missions were to be a “banker’s bank,” a lender of last resort for banks whose deposits were overextended or loans oversubscribed, and to hold enough gold in reserve to meet the needs of the nation during economic panics. Those functions are how it got its now somewhat deceptive name, which implies that the Federal Reserve is a place where money is stored “in reserve.”

In modern times the Federal Reserve’s primary undertaking has been tinkering with interest rates, to fulfill its modernized mandates of controlling inflation and assuring full employment. It hasn’t done a great job at either, and has created a damaging wealth disparity that will affect our nation for generations.

American wealth disparity now exceeds the vast chasm of the Gilded Age, immediately before the Great Depression. Income inequality in the U.S. is so extensive that our own CIA compares us to such kleptocracies as Cameroon and Russia. A short, 10-minute drive through Los Angeles exposes this disparity, in our own backyard. California of the future runs the risk of devolving into Marie Antoinette’s France, where the oblivious rich ostentatiously display their fortunes, while scores of commoners look on with a mix of envy and rage.

The Federal Reserve plays the predominant role in this condition. In the last decade, it has created trillions of dollars and kept interest rates epochally low. “Printing” money invariably leads to inflation somewhere, and for a long time, the Fed’s actions drove up the cost of everything from food to gasoline. To avoid runaway inflation, our nation had to change. The last domino before runaway inflation is wage inflation. To keep up with the rising cost of goods, wages must increase too. But this has not happened. The average family today makes about as much as they did in 1980.

This is because the system — Congress, corporations, and covetous world leaders — instead reacted with globalization, i.e., free-trade agreements and a complete liberalization of trade and tariff policies that took jobs like manufacturing, previously done by well-paid Americans, to sweatshops overseas. Many American families can no longer afford the things we want, from air conditioners to iPhones, unless they are made overseas with $5-a-day labor.

But the Federal Reserve’s biggest contribution to wealth disparity, and the one that will take generations to change, is the effect of its money-printing policies on asset prices. The newly created money cascading down Wall Street must be invested somewhere.

The property and stock-market bubbles, which the Federal Reserve now acknowledges it created, have benefited the gentry, because the rich own far more property and stocks than the poor. When those assets geometrically expand in value but wages stagnate, the result is tremendous wealth disparity. Yet when the Fed-created bubbles contract, the middle-class wage earners foot the bailout bill.

Are there small-scale solutions available to policymakers? Sure. For example, I support raising the minimum wage. But many of these efforts amount to using a squirt bottle to extinguish a three-alarm fire. They are not enough. Raising someone’s pay from $25,000 a year to $29,000 every 10 years will not foster a more egalitarian society if easy-money policies continue to expand geometrically the vast fortunes of the fantastically rich.

The people who created our nation explicitly prohibited royalty, and warned that vast concentrations of wealth could make our nation like the tumultuous societies many Americans tried to escape. Lawmakers at every level of government — and citizens, alike — should question the monetary policies of the unelected Fed bureaucrats. I fear that their far-reaching decisions are enshrining an inequality in our society that no legislation at the federal, state or local level can ameliorate.

Assemblyman Mike Gatto, D-Burbank, represents the 43rd District.

Originally published by the Los Angeles Daily News