The Fed's Duplicitous Goals

Duplicitous is my big word for the day. According to Wikipedia, "Someone who is duplicitous is almost like two people, saying one thing but then doing something very different, even contradictory." You might called them two-faced.

When the Fed said recently that they are worried about inflation getting too low, I think they are being duplicitous. The Fed doesn't give a rat's patoot about low inflation. The Fed cares about one thing and one thing only -- growth slowdowns and recessions. That's it. Yet they persist in this nonsense about inflation being too low.

Why would the Fed want to be duplicitous? Let's back up. The Fed is the institution in this country responsible for monetary policy. Monetary policy is generally thought of as one of the most important components of a country's macroeconomic policy. The government uses its fiscal policy to achieve macroeconomic goals. The Fed uses monetary policy. Ok? Big gulp of JD.

Every institution has goals. The Boys & Girls Club wants to provide a safe place where kids can go after school to learn sports and games. Your local neighborhood bar creates a nice place for you to go after work so you can have a drink and unwind with your friends.

The Fed has macroeconomic goals so it can provide a non-inflationary growing economy. The Fed has been historically clear that it has two goals -- assist economic growth and keep inflation low. Notice -- keep inflation low, not high. That sounds nice, but like a juggler with only one arm, it is very challenging if not impossible to "kill two birds with just one stone". And that's the rub with Fed policy -- it only has one tool or instrument of monetary policy.

If the economy is growing too slowly or is contracting, the Fed tries to juice it up with lower interest rates. If the economy is growing too fast and inflation rises, it tries to slow things down with higher interest rates. Interest rate control is the one-hand or the single instrument of the Fed. That's all it has. One hand for juggling the economy.

Notice that the whole story focuses on economic growth -- keeping it from growing too slow or from growing too fast. Inflation comes into the story but only because it is the other side of the coin. The Fed doesn't care a whit about inflation. It cares about growth.

When the illustrious leaders of the Fed tell us inflation is too low during a time period when output is actually strong, it makes no sense. It is a trick to divert your eyes from what they are really doing. What they are really doing is playing national savior. The problem is not that economic growth is low -- the problem is that they think they can look into their crystal ball and know that without their intervention, economic growth might slow in the future.

It sounds nice, right? They have managed the economy so well today that they are now ready to manage the future too. Unfortunately, they don't know the future any more than they know when the next earthquake will hit Seattle. Surely one is coming but I doubt anyone knows when.

It is these errors in timing that usually cause the most havoc. Diddle around all day and then get on the I5 at 5 pm, and you will understand what I mean. The Fed is famous for worrying so much about future economic growth slowing that they try to keep interest rates low much longer than they really should. Virtually every period of dangerously high inflation in the US in the last 50 years came because the Fed fed the economy's furnace with money too long. Then they play the frying pan/fire game. Fight weak growth one day. Cause inflation. Fight inflation the next. Cause a recession.

What is the duplicitous point here? The point is that the Fed does not have a mandate or a policy goal to prevent inflation from falling. In fact, I doubt that they really believe that inflation will fall so low as to become a problem. What they do believe is that the rate of economic growth might fall in the future. But they don't want to admit that. It seems more responsible to be fighting low inflation today than to be attacking a predicted future slowdown. That doesn't seem more responsible to me, but then I don't work at the Fed.

I wish they would either be more honest or just quit doing that stupid stuff. Lower interest rates after a decade of low interest rates is not going to be the solution to any of our problems, much less the next recession.