Wednesday, December 18, 2013

The Taper: Monetary Nonfeasance

The Fed’s long-awaited taper has finally begun.

Having added $1 trillion to its assets in 2013, and having failed to achieve either of its statutory mandates, the Fed has decided to reduce purchases while predicting eventual victory: “The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.” Not tomorrow, but someday.

And what about deflation risk, Bernanke’s  personal bete noir?  “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”  “Monitoring” will prevent deflation; that’s a new policy tool. Bernanke said today that “inflation can’t be picked up and moved where you want it.” This from the man who said that a central bank could always create inflation using the printing press.

It is noteworthy that, unlike Draghi who talks through all of the data including money growth, Bernanke does not. This saves him from having to explain why he has no control over money growth. Instead he repeats the line that the Fed is providing a “highly accommodative stance of monetary policy”. Which is actually not true, when we are looking at 6%  money growth, 1% inflation and 3% nominal growth. That is not a highly accommodative stance.

In point of fact, the Fed has been tightening for the past two years, with M2 growth falling from 10.5% to 6.0%, inflation falling from 2.0% to 1.1%, and nominal growth from 5% to 3% (YoY). QE3 has had no impact on money growth. At present, using its current policy instruments, the Fed has no control over the independent variables in the Quantity Theory: the money supply and velocity. This is why nominal GDP has been sliding sideways.

Where is Chairman-to-be Janet Yellen in all this? We don’t know. Bernanke says that she is on board with tapering, although I doubt it. I think that she is keeping a low profile until she takes the helm. Then we will find out what she really thinks.

I hope that Obama nominates Stanley Fischer* as vice chair, which would add a lot of heft to a weak team, and might add some firepower to the doves. He’s a monetarist, not an Austrian.  At MIT, he was the thesis adviser for Ben Bernanke, Mario Draghi, and Greg Mankiw. You can’t beat that!
*Who would be the first African native to sit on the FOMC.

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