Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

The Fed Has Just Stopped Making Sense

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I do not see how the FOMC statement today can be read as a coherent document. Let's go through this line by line.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."

Got it. Maximum employment. Price stability.

"The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."

So much for maximum employment, at least any time soon. One half of mandate missed.

"The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further."

So they're missing the price stability targets too. Entire mandate missed.

This must mean that they're going to take new measures to correct this, right?

Oh. Nope. What they are going to do is just what they've been doing.

How does that make sense? How is that consistent with the statutory mandate?

Unless the Fed thinks that it is "out of bullets," the Fed really shouldn't ever have forecasts like this. If it thinks that current policy will result in missing both employment and inflation targets, their policy should change enough that the Fed can forecast hitting its targets.

Look at it this way. Imagine you are driving a car home from work. You want to get home by 6:30 while driving at the speed limit. You notice that you are driving 15 miles slower than the speed limit and won't be home by 6:30. What's the proper thing to do: change your forecasted arrival and forecasted speed? Or speed up to the speed limit so that you get home close to 6:30?

Now it's possible the car is broken. Or out of gas. Or you are stuck in a traffic jam. Or the gas pedal or speedometer are unreliable. But then why doesn't the Fed explain this, rather than just saying it's going to get home late at a slower speed?

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