Quantitative easing is poised to come to an end this month—at least, that’s the current strategy. The monthly tapering of $10 billion will reduce the Federal Reserve’s QE3 bond buying program from $85 billion monthly to zero.
However, this doesn’t mean the Fed will cease operating under extreme monetary policies. Notably, the federal funds rate remains near zero, a situation that began in the aftermath of the 2008 financial crisis.
Six years later, the rate is still held firmly down. According to recent statements from the Federal Reserve, they plan to keep the federal funds rate dormant for another six months. Of course, this plan is subject to change based on economic developments.
The Fed’s inconsistent approach has led many to believe they are making decisions on the fly. Should they raise interest rates? Should they halt increases in the money supply?
The answers to these questions hinge on which data points they consider significant. For a considerable time, the Fed indicated they would exit QE when the unemployment rate dipped below 6.5 percent. Yet, when that benchmark was reached, they deviated from their plan and adopted a new strategy.
Pursuing a 2 Percent Inflation Goal
Currently, the Fed’s focus seems to zero in on attaining a 2 percent inflation target. They argue that this benchmark is essential for maintaining price stability and maximizing employment. Here at Economic Prism, we take issue with this approach.
We advocate for a stable money supply, allowing variables such as employment, wages, and credit prices to adjust according to market dynamics. While our perspective is clear, it is not the central issue at hand. The point is that, with QE on the verge of expiration, we are witnessing an unexpected trend: inflation is decreasing, not increasing. What should the Fed’s response be?
Reuters reports that “after months of concentrating on slack in U.S. labor markets, the Federal Reserve is now confronted with the possibility that weak inflation may be entrenched enough to disrupt the return to normal monetary policy.”
The report continues, “The sluggish global inflation landscape—driven by plunging oil prices and stagnant wages in advanced economies—has sparked debate over whether the Fed and its counterparts need only wait for a slow economic recovery, or if they need to confront a shift in the fundamental nature of inflation following the global recession.”
“This uncertainty has become the Fed’s primary concern in recent weeks, likely to influence policy statements and further delay any uptick in interest rates, which have been near zero for almost six years.”
A Century of Missteps
This coming Wednesday, we will learn about the Fed’s latest strategy. Will they extend QE? When will rates finally go up?
These are critical questions, as they affect the cost of money. Consequently, the price of money influences the cost of all goods and services in the economy.
Central planners hold the belief that by manipulating the price of money, they can achieve the seemingly impossible ideal of “maximum collective welfare.” Despite a hundred years of unsuccessful attempts, they persist in their efforts.
They demand a 2 percent inflation rate and then engage in various measures to achieve it. They suppress interest rates artificially and expand the money supply recklessly.
Both practices fuel mass inflation; yet, despite these efforts, inflation continues to decline. The Fed consistently fails to recognize that the economy does not operate like a predictable linear model. It is far more complex. Attempting to connect the dots and craft policy decisions based on them often results in outcomes that diverge from reality.
“In my view, a wise and humane policy is sometimes to allow inflation to rise, even when it exceeds the target,” remarked former Fed Chair Janet Yellen.
Unfortunately for Yellen, wishing for it won’t make it so.
Sincerely,
MN Gordon
for Economic Prism
Return from One Hundred Years of Failure and Counting to Economic Prism
