The Fed Promises More Dollar Destruction

Mises Institute

The Federal Reserve has potentially had the most memorable year in its more than a century–long history. What started out as a year of “Will they or won’t they cut interest rates?” blossomed into a time of slashing rates to near zero, unleashing unlimited quantitative easing, purchasing corporate and municipal bonds, and growing its balance sheet to a record high. Now, as the economic consequences from the covid-19 pandemic linger, the Fed has taken advantage of the crisis to modify its policies to be more expansionary — which will inevitably blow bubbles and wreak havoc on households everywhere.

The Jackson Hole Shift

Fed chair Jerome Powell delivered prepared remarks during the annual Jackson Hole symposium. Powell virtually announced a historic policy shift in the way the US central bank approaches inflation. The standard policy had been that when inflation climbs, the central bank raises interest rates to curb it, much like what happened in the 1980s. The Fed is no longer utilizing this strategy. Instead, it is damn the torpedoes and full speed ahead.

According to “robust adjustments” to the Statement on Longer-Run Goals and Monetary Policy Strategy, the Powell-led institution will embrace average inflation targeting. This will enable the Fed to let inflation run above the 2 percent target rate after periods when it has come in below that level. Now that the Fed no longer feels compelled to raise rates when inflation surges or the unemployment rate drops, is there a specific number the Eccles Building needs to anticipate? No. Powell stopped short of listing what jobless and inflation rates he would prefer to see, choosing to allow the market to determine what is too much inflation and what is full employment. He also did not say what would happen if inflation increases beyond what the Fed would like.

Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy. [The situation] can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.

We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. We want to do what we can to prevent such a dynamic from happening here.

Powell was short on a lot of details, but what we do know this heralds: more inflation and low rates.

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Source: Andrew Moran | Mises Institute

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