Fed Up with the Fed

Despite the April job numbers, the Federal Reserve continues to slow walk the economy forward. “Federal Reserve Chair Janet Yellen and her colleagues have lowered their sights on how fast the economy needs to expand to meet their goal of cutting unemployment,” Bloomberg News has reported. “No longer are they saying growth must accelerate from the 2 percent to 2.5 percent pace it has generally averaged since the recession ended. Instead, they are stressing the importance of preventing the expansion from faltering.”

Of course, the economy has been stumbling and faltering for years. Carnegie Mellon Professor Allan Meltzer wrote in the Wall Street Journal that “some side effects of the Fed policies have had ugly consequences. One of the worst is that ultralow interest rates induced retired citizens to take substantially greater risk than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do.

Accumulating data from the sluggish loan market and the weak responses of employment and investment should have alerted the Fed that the growth of reserves and the low interest rates haven't been achieving much. Similarly, the Fed should have noticed in recent years that instead of a strong housing-market recovery, not many individuals were taking out first mortgages. Many of the sales were to real-estate speculators who financed their purchases without mortgages and are now renting the houses, planning to resell them later.

John Cassidy observed in the New Yorker blog in April: “The longer the Fed keeps interest rates at ultra-low levels and promises not to raise them rapidly, the greater the danger of history repeating itself. Two things that we know about bubbles are that, once they get going, they are self-reinforcing, and that they place central bankers in a bind. For as long as the bubble lasts, the economy looks great, and policy makers have an incentive to let it proceed. This is what happened to Greenspan and Bernanke.”

The Fed disdains any inflationary impact of its policies, but elsewhere in the Wall Street Journal, Josh Zumbrun wrote: “The two main U.S. inflation gauges, the Labor Department's consumer-price index and the Commerce Department's personal consumption expenditures price index, are hovering near the lowest levels ever seen outside of recessions.

Both sit poised to drift upward. Wholesale and import prices show signs of picking up, suggesting some inflation in the pipeline, and some items that briefly declined in price over the past year—such as prescription drugs, financial fees and garments—have started climbing again.

Zumbrun noted: “The Commerce Department's PCE and the Labor Department's CPI assign different weights to the basket of goods they track, and use differing statistical methodologies, to estimate inflation. The Fed prefers the PCE index, which tends to show slightly lower inflation than the CPI.”

Too much inflation may reveal an overheated and overstimulated economy. Yet for many economists, somewhat more inflation would be a sign of vigor, while less inflation—a potential effect of an overseas slowdown or continued labor-market weakness—would signal weakness and stagnancy.

In an April speech to the Economic Club of New York, Yellen had stated that she expected inflation to rise somewhat. Meanwhile, unemployment will rise in Boston when the Federal Reserve of Boston slashes 160 jobs due to a new Treasury policy.