Fed's Dual Mandate Is Mission Impossible

[bobbyw24]

http://globaleconomicanalysis.blogsp...mpossible.html

Fed's Dual Mandate Is Mission Impossible


While market participants are giddy with thoughts of a V-Shaped Recovery, and Bernanke is taking victory laps celebrating Orwellian Madness "We Saved The World" other members of the Fed are a bit more realistic.

For example, Fed's Lockhart sees protracted high unemployment.

"My forecast envisions a return to positive but subdued gross domestic product growth over the medium term weighed down by significant adjustments to our economy," Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks.

"My forecast for a slow recovery implies a protracted period of high unemployment," said Lockhart, a voting member of the Fed's policy-setting committee this year.

"The challenge my colleagues and I face is navigating between the risk that early removal of monetary stimulus snuffs out the recovery and the risk that protracted monetary accommodation stokes inflation expectations that could ultimately fuel unwelcome inflationary pressures," he said.

"The Fed must deal with this tension, particularly in coming quarters, as we pursue our dual mandate of price stability and maximum employment," Lockhart added.
Dual Mandate Equals Mission Impossible

Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.

Sure, the Fed can increase money supply but all those who thought it would necessarily cause prices to rise sure got it wrong.

The CPI is now a negative 2.1% year over year and my preferred measure called Case-Shiller CPI is running at negative 6.2% year over year. Please see What's the Real CPI? for details.

The simple truth of the matter is the Fed can print money, but it cannot control where it goes, or even if it goes anywhere at all. Indeed the Fed can encourage but not force banks to lend, and encourage but not force consumers to borrow.

The result of all the recent Fed printing is a big yawn, otherwise known as excessive reserves as the following chart shows.

Excess Reserves of Depository Institutions



Does that chart look like the Fed is in control? If so, control of what?

Bear in mind that those excess reserves are a mirage. They do not really exist. Pending writeoffs in foreclosures, bankruptcies, credit cards, and especially commercial real estate will eat up those reserves and then some.

Although the Fed's "Dual Mandate" is complete nonsense, I do agree with Lockhart on one key point: The US economy will suffer with Structurally High Unemployment For A Decade.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

[enjerth]

That's right. The interest rate is a price for debt, and you can either have abundance with a low price, or scarcity with a higher price, manipulating market forces rather than issuing a mandate.

In the end that just proves that price controls don't work.

[theoakman]

actually, it's not impossible. If they would simply resist the urge to inflate currency, you would have high stable employment and low inflation. The problem is, in order to get to that point, we probably need to send this country into a depression.

[enjerth]

actually, it's not impossible. If they would simply resist the urge to inflate currency, you would have high stable employment and low inflation. The problem is, in order to get to that point, we probably need to send this country into a depression.

The point is, to stimulate business (creating jobs) they open the money spigot, guiding interest rates down, because they don't control the lending rates of other banks directly. They control it by controlling the availability of credit. But that comes at the cost of inflation, which is the other mandate of the Fed, to control prices. To accomplish that, they have to close the spigot. When faced with inflation and job losses, they have to pick just one to work on.

The money spigot is a 2-edged sword.

[theoakman]

The point is, to stimulate business (creating jobs) they open the money spigot, guiding interest rates down, because they don't control the lending rates of other banks directly. They control it by controlling the availability of credit. But that comes at the cost of inflation, which is the other mandate of the Fed, to control prices. To accomplish that, they have to close the spigot. When faced with inflation and job losses, they have to pick just one to work on.

The money spigot is a 2-edged sword.

if you have responsible policy, you won't have the problem of inflation or unbearable job losses.

[enjerth]

if you have responsible policy, you won't have the problem of inflation or unbearable job losses.

If by that you mean a policy of doing nothing, then I agree. But then, what's the point of having a central bank?

[Matt Collins]

CFL member, DC attorney, and good personal friend, Nicole Kardell goes live on Russian TV to discuss the FOIA request for the Federal Reserve. This is major international coverage!


YouTube - Could release of Federal Reserve documents cause panic?

[theoakman]

If by that you mean a policy of doing nothing, then I agree. But then, what's the point of having a central bank?

Ding ding ding, we have a winner.

[jon_perez]

The point is, to stimulate business (creating jobs) they open the money spigot, guiding interest rates down, because they don't control the lending rates of other banks directly. They control it by controlling the availability of credit. But that comes at the cost of inflation, which is the other mandate of the Fed, to control prices. To accomplish that, they have to close the spigot. When faced with inflation and job losses, they have to pick just one to work on.

The money spigot is a 2-edged sword.

That's a fair summary of the situation.

I'd like to add that I think the problem here is one of vocabulary. Stimulating productivity should be the real goal because productivity = wealth (material, at least). Stimulating "business" / creating jobs that don't really add to productivity via taxation (indirect or otherwise) is just robbing peter to "employ" paul.

I will argue that having the right amount of liquidity is necessary to promote productivity. I, for one, do not find logical the thesis that any amount of money supply will always be the right one. You DO need to worry about the money supply to some extent. But arguments about the money supply should be a sideline debate. The main debate should instead be: how does one abet productivity within an economy? Number of jobs created is not even the real question here. While having more jobs is good in general, I think you will find that in a very productive economy, even people who are officially jobless will not necessarily be having a hard time. In a marginally productive economy however - especially one where jobs come at the cost of debased currency and distorted price structure, even those people who are supposedly earning money may face a lot of hardships in fulfilling their material needs and wants.

I think you will find that if you keep this issue (productivity) foremost in mind instead of being led to believe that abstract finance/economics issues are what should take center stage (which seems to be what economists have sneakily or unwittingly maneuvered us into over the years!), you will not end up with a sociopolitical setup where non-value producing leeches like bankers and financial speculators end up sucking the lifeblood out of the rest of us.

While debates about monetary policy and such are still very important, their taking center stage I think ignores the reality that at the end of it all, wealth = productivity and flows of credit and monetary arrangements are just frameworks with which to manage such tangible wealth.

While Americans were busy having their economy "guided" by central bankers believing in the illusion that this is what was directly responsible for generating wealth, the Chinese took the lessons of America 50 years ago and were busily creating real wealth.

[hugolp]

I will argue that having the right amount of liquidity is necessary to promote productivity. I, for one, do not find logical the thesis that any amount of money supply will always be the right one. You DO need to worry about the money supply to some extent.

I have to say I can finally agree with you in something. The only part I am sure I wont agree is this one.

The main problems about liquidity is not the quantity of liquidity but the variations it suffers. The nominal price its not important. So develop more the point please.