Taps Coogan – July 2nd, 2021

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Former Fed Board Nominee Dr. Judy Shelton, who was recently passed over for a spot on the Federal Reserve Board, spoke with CNBC‘s Joe Kernen about the absence of hawks at the Fed and how we would go abound normalizing policy if that were ever to be an objective of policy makers.

 

Some excerpts from Judy Shelton:

“It would start on the fiscal side with a responsible Congress and we would hope people would start talking again about the need for a balanced budget, which seems pretty far fetched at this point. But, if you look at who is officially charged with reasonability for stable prices, then of course that would be the Federal Reserve… The problem is the definition of stable prices has turned into stable inflation with a 2% target. That’s kind of an oxymoron in itself, but even more, the Fed now says that they are aiming for moderately higher than 2% for some time until they make substantial progress towards their goals. None of those terms are defined with any specificity. So, so much for forward guidance…”

“We are now going back to this Philips Curve mentality that you sacrifice one for the other (inflation or labor participation). It was Paul Volcker that said that stable prices give you the foundation to maximize employment, so it really shouldn’t be seen as a trade off…”

“(The Fed) is really financing that reckless spending by the government and in that sense enabling it… The Fed then buys (federal debt) by creating liquidity for the banks in the form of crediting their depository accounts… You’re training the banks to engage with the Fed and to buy and sell government securities instead of doing what you would hope banks would do in the process of financial intermediation and making loans that increase the productive capability of the economy…”

Dr. Shelton’s nomination for the Fed attracted quite a bit of controversy. Many claimed that she was either too political or under-qualified for the post. Regardless, what she does highlight is the absence of actual intellectual diversity on the Fed’s FOMC. 

Take the 2% target for example. The arbitrary target has only been in place since 2012. The late and great Fed Chairman Paul Volcker critiqued the 2% target as recently as 2018 in Bloomberg:

“I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year. Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Yet, as I write, with economic growth rising and the unemployment rate near historic lows, concerns are being voiced that consumer prices are growing too slowly — just because they’re a quarter percent or so below the 2 percent target! Could that be a signal to “ease” monetary policy, or at least to delay restraint, even with the economy at full employment?

Certainly, that would be nonsense. How did central bankers fall into the trap of assigning such weight to tiny changes in a single statistic, with all of its inherent weakness?”

Paul Volcker could get away with saying that, but nobody on the Fed or in the academic clique surrounding it could dream of doing so these days.