The monetary policy objective of Federal Reserve Board is to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. But, if after seeing Fed’s economic projections you find it hard to believe in its commitment to these objectives then you would be forgiven.
Fed is projecting very high unemployment rate for the next three years – 8.0 to 8.2 for 2012, 7.5 to 8.0 for 2013 and 7.0 – to 7.7 for 2014. It is projecting the inflation to be much lower than its target of 2 percent for the same period. Despite this, the Fed decided to do bare minimum in its last FOMC meeting on June 19 and 20. Not only that, it seems that the question that the committee was considering was whether or not to continue the operation twist.
“It’s a continuation of the existing policy,” said [James] Bullard, who doesn’t vote on the Fed’s monetary policy this year. “The committee felt that it was maybe a bit imprudent to end the twist program right at this particular juncture. The committee has kind of been haunted by having end dates on programs and it seems like the end dates never occur at the right moment.” Operation Twist was to have ended this month
At least this time the Fed did not mention maintaining its inflation-fighting-credibility as a reason for not doing much. Still, Paul Krugman calls the Fed, the intimidated one.
The intimidated Fed: The minimal action — extending Operation Twist — wasn’t just inadequate, it was shameful. The Fed has a dual mandate, employment and price stability. Its own projections show high unemployment persisting for years and years, inflation running below its target — and realistically its inflation projections are too high while its unemployment projections are too low. There is no rational argument I can see for not going all out with monetary stimulus.
It is not that the Fed thinks that another round of QE will not work – it thinks it will.
“We can do that and I think it would be effective,” Bullard said in a television interview on Bloomberg Surveillance with Tome Keene. “But we’d be taking a lot more risk on our balance sheet. We’d be going further into uncharted territory.”
Rather it thinks that a possible third round of quantitative easing would face a “pretty high hurdle.” S&P futures, which were doing quite good till Bullard’s interview in the morning, tanked after his comments. Futures recovered later but the market still believes that despite growing global recession threat, the Fed will not do much about it.
That brings us to the title of this post – if the unemployment rate of 7 to 8 percent till the year 2014 is not high enough hurdle then either the definition of full employment is changed 7 to 8 % or the Fed has washed its hands off the unemployment mandate.
