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The Fed’s Mandates And The Coming Scenario
American Thinker
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
Often referred to as the “Dual Mandate” of the Federal Reserve, remarkably I count three mandates in that mission statement.
- Maximum Employment
- Stable Prices
- Moderate Long-Term Interest Rates
Regarding stable prices, Federal Reserve Chairman Bernanke has said on multiple occasions that he seeks 2% (or more) core inflation. In 2011, the Consumer Price Index rose over 3%. At a 3% annual, and compounded, prices in the United State will double every 24 years. This seems like a failure of attempting to achieve price stability. Even at 2%, the alleged target, prices double every 36 years. The question is, why this is not considered a failure by the Federal Reserve, rather than an unquestioned though dubious goal?
Regarding moderate long-term interest rates, we must realize that the term “moderate” is a relative term referring to historical measures. Record-low long-term rates are by no measure “moderate.” Again, why is this not seen as a failure of the Fed to follow its mandate?
Monetary policy has demonstrated, over four years, that the cost of money cannot revive a manufacturing base that has left the country. Sadly, the Fed will push on the string for three more years if Bernanke has his way. The sharp collapse of the velocity of money as shown by this chart from the St. Louis Federal Reserve demonstrates that the Federal Reserve is meeting unintended consequences of its applied theories. Sometimes theories and mandates must be revisited.
Perhaps a fair return on money, more in line with the forgotten “moderate interest rate” mandate, is what is needed to encourage the missing lending, investing, and spending that drive velocity.
All of this is of greater concern when it is realized that there is a cocktail of inflationary ingredients awaiting the tumbler. Loose money policy is ingredient number one. Like with a gas pump nozzle remaining in an overflowing gas tank, Bernanke’s attempt to move the needle on employment will set the spark for the unintended surge of inflation beyond his 2% target. In fact, per the 2011 numbers, it already has.
Secondly and most predictable will be the grocery store shock that will begin to manifest itself early in 2013. Due to conditions out of the control of the federal government (there are a few remaining), the drought of 2012 has decimated our grain stocks. Together with the poor vegetable and tree fruit harvests, we will also be met with the meat herds and chickens on feed being liquidated due to high feed costs. Initially and currently, meat prices will drop on the liquidation supply. But then the rationing of higher prices will begin. Cereal prices will also rise. High grocery prices are likely to be the headline of 2013. These high costs will conflict with the Federal Reserves; efforts to actually “control inflate” the economy. A conundrum for the theory-bound experts at the Fed.
