‘We are back in the land of discretion. Rules did not work, because the Fed set the wrong rules’

Good stuff from Robert Brusca:

In the end, the Fed has eliminated the 6.5% trigger that wasn’t a trigger. Yellen has replaced it with a laundry list of things that matter with no objectives for any of them. We are back in the land of discretion. Rules did not work, because the Fed set the wrong rules. But the policy objective of price stability- and that means 2% inflation- is still there and still not being met. Moreover, the Fed is willing to hike rates and slow progress toward the 2% goal long before we get there, an act that slows the drop in the already too-high rate of unemployment.

The Fed continues to see lower rates of unemployment than it was projecting in the past. But the Fed’s own projections of growth are being trimmed. How does the unemployment rate make this accelerated progress? It’s all due to the magic of demographics. The Fed is relying on a continuation of a process it really does not understand and did not anticipate. It is willing to PLAN to raise rates on the notion that this process will continue. Who says the Fed ain’t got religion?

The Fed has not told you using its fabled transparency that this is the process by which unemployment rates will drop faster. Janet Yellen registers deep concern about all sorts of labor market characteristics but she is stopping QE which is the one thing the Fed was doing that might have helped. Moreover, the Fed is planning to raise the fed funds rate with inflation below target and expected to remain below target. Fed policy amounts to hoping that demographics will reduce the rate of unemployment faster. … While Janet urges you to ignore ‘the Dots’ I urge you to shred the Fed statement and to look only at ‘the Dots’ and the other projection materials. They describe the lay of the land and conditions where the Fed really plans to live. The statement is a cover story.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas

2 thoughts on “‘We are back in the land of discretion. Rules did not work, because the Fed set the wrong rules’

  1. If you can’t see inflation with a microscope, then use a telescope…look far ahead…maybe someday we will have inflation, so tighten up.

  2. These posts remind of my old college professors who would always have a laundry list of reasons communism hasn’t worked out — so far. There was always some minor decision along the way that derailed the whole project. “If only this had been done that way!”

    The problem with the Fed isn’t the Evans Rule, a GDP Rule, the “Dot Plot,” or any other Fed nuance — it’s the very idea of a central bank trying to micromanage the economy. Statism never works, even in banking.

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