After eight years of extremely loose monetary policy, the economy is great again and we are to enter into a post-stimulative era of monetary policy. So said Yellen at a recent discussion at the University of Michigan. In her words, the Fed had given the economy all the “oomph [they] possibly could” and it was time to “allow” the economy to coast along.
Paying no attention to their own econometric constructs such as the GDP, the Fed has declared that the economy is fantastic. After all, the unemployment rate has leapt downward over the last several years (just don’t look at the denominator — the labor participation rate) and the Fed’s inflation measures are right around their arbitrary 2% level. Allegedly, these two pieces (and the unrelenting stock market) means everything is great!
According to the WSJ‘s summary: “Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate.” So the financial system, after eight years of balance sheet expansion at the Fed, is stable, unless it’s not. Then what? Well, then the rate-rising narrative will quickly reverse and we’ll be back where we were — more stimulative monetary policy!
Yellen couldn’t resist a hearty slap on her own back as she praised the Fed as doing well at — get this — keeping inflation low. Seriously. They run around with their hair on fire in panic that deflation is a great threat and that the Fed’s balance sheet needs to be quadrupled in order to Save the World. Then they express pride at their ability to keep inflation low. Of course, last year they were frustrated because they just could not hit the 2% inflation target! Amazing. Every data point is either an excuse for more Fed intervention, or otherwise a reason to bow to the cheering media.
Naturally, even despite claiming that the economy is doing well and that we can return to normal, there is still the qualification that there has been some “long-term changes to the US economy” that are going to require a “lower for longer” interest rate mentality. That is, we aren’t really returning to normal. The proper interest rate in the Fed’s mind is much lower than it was historically.
As if they could know what the proper rate of interest should be. As if their models, which ignore the capital structure and human action, can replace the insight offered by humans acting in the market according to their own consumption and saving preferences.
We end with this, from Yellen: “Evidence suggests that the population roughly expects inflation in the vicinity of 2%.” Well, perhaps that’s because the Fed and it’s financial media lapdogs have been screaming for 2% inflation for years. To the extent that the population pays attention to how much they are being scammed by the central bankers, it seems reasonable that they “expect” an inflation rate comparable to what is blared on television.
Is this the end of stimulative monetary policy? Only until the Fed and the academicians realize their Goldilocks economy is sham and they have to double down to prevent another recession. Because stimulus is all they know how to do. And they reject completely the benefits of a healthy, healing, old-fashioned depression.
