Paul Krugman wrote a good article on his blog this morning. It is about all of this talk of tapering the Fed’s quantitative easing (QE) program. All this week I’ve been wondering what the hell is up with Bernanke. Whatever happened to keeping interest rates low until at least the end of 2014? Whatever happened to the concerns about dangerously love inflation? Is Bernanke seeing something in the economy that the rest of us have missed?
Of course the answer is no. The number one problem with the Federal Reserve is that it is run by a bunch of people who are completely divorced from the real economy. Yes, it is true that corporate profits are great. Wall Street is doing great. Bankers are rolling in money. There never was a better time to be rich. But the rest of us are hardly doing well. Here is the employment to population ration from late last year. It hasn’t gotten any better over the last year:
The biggest tool that the Fed has is useless: it can’t lower interest rates because they are already effectively at zero. As Krugman noted, that basically leaves one tool: expectations. The Fed could indicate that it will maintain a loose money policy until the economy is well into recovery. But this recent discussion destroys this tool as well. The Fed has effectively proclaimed to the world that the slightest indication of a recovery will cause them to clamp down. God forbid that we have even a tiny amount of inflation which might harm the power elite.
Not only is this a very bad policy for now, but what will the Fed do if our feeble recovery slows or even reverses? Krugman explained the problem:
In general, the Federal Reserve is a good thing for everyone. It provides stability in the economy. But its laser focus on keeping inflation absurdly low is only done to help the rich. In my opinion, it should not target an inflation rate of 2%. That’s ridiculous! That’s a rate designed only to please the rentier class. It should be targeting 3% or perhaps 4%. Instead, it targets this absurdly low inflation rate and doesn’t seem to care at all what the unemployment rate is. As Matt Yglesias brilliantly asked last year, “If the unemployment and inflation rates were reversed, would the Fed do something about it?” But as long as Bernanke and all his power elite friends are doing well, then everything is a-okay.
Update (21 June 2013 8:26 am)
Federal Reserve Bank of St. Louis put out a press release this morning. President James Bullard dissented from the FOMC’s Wednesday decision. It stated, “President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.” The funny thing is that Bullard is no liberal. He believes in that 2% inflation target. It is just that this stuff is simple: lower inflation is only good up to the point. If you are going to target an inflation rate that is this low, then low inflation is as bad as high. The Fed is acting irresponsibly and not in the public interest.