There are few silver linings when it comes to this nation’s monetary policy, especially for those who watch their fortunes evaporate on the whims of Janet Yellen’s great crusade to manipulate unemployment statistics to make Obama look good.
Perhaps the only redeeming aspect of the entire Fed is the fact that our taxpayer dollars do not (directly) subsidize them, for the institution pays its bills based on its holdings of government securities, unlike the IRS, whom we pay to take money from us.
This financial independence, of course, means that the Federal Reserve is not beholden to answer to Congress for their decisions. Economists, however, have to make decisions and then face the scrutiny of their fellows, rendering a potential ivory tower into a fierce competition to be correct, and to be correct first.
A new analysis by the US Monetary Policy Forum suggests that the Federal Reserve has failed to properly monitor inflation because the tools they use to do so are flawed.
The Federal Reserve lives and breathes the Phillips curve, an economic idea that suggests unemployment and inflation are caught up in a zero-sum game; decreasing unemployment results in increasing inflation and vice-versa. Despite the fact that the Phillips curve has been shown to be limited in its application — it failed to predict the stagflation of the 1970s, when both inflation and unemployment rose — it’s considered all but gospel for Yellen and her cronies.
As a result, the most powerful economy in the world is in thrall to the dual indices of inflation expectation and labor market availability, which in turn has kept inflation well below a healthy 2% mark. Despite the fact that we want our money to remain as valuable as possible, poor inflation growth results in decreased consumer confidence: why spend $100 on a television today if it will cost $95 tomorrow?
The failure to manage inflation may come from a failure to understand inflation. New research from JP Morgan and DeutscheBank economists suggest that the all-important inflation and labor market indices fail to give the Fed the right information for their policy decisions.
The predictive power of inflation expectation and labor market availability hasn’t pulled its weight: the study claims that the better predictor of inflation is previous periods of inflation rather than the relationship with the available labor market. The same study casts serious doubts on the Philips curve (and, in turn, Yellen’s capability to analyze the economy) by claiming little, if any, relationship between inflation and labor force participation.
The findings may seem mundane to those who aren’t used to studying the movement of trillions of dollars, but they have significant ramifications for the Fed. Yellen has kept inflation and interest rates as low as possible, pitching the US ever closer to the threat of Japan-style negative lending rates, leading to President Trump’s suggestion that such baseline policies are politically motivated, not economically motivated.
With Obama’s highly-promoted decline of unemployment, built on the back of unsustainable part-time work and workers leaving the labor market altogether, this claim appears dangerously accurate. Trump’s vision of monetary policy differs significantly from the “strong dollar” policy of previous administrations.
At a time when the greenback is crushing nearly every global currency, greater interest rates will provide welcome relief to our export markets, while also facilitating more lending from banks by removing the incentive for them to sit on their cash. This likely puts Trump and the Fed on a collision course in the near future.
If monetary policy wonks change their goals after reading the Policy Forum’s findings, it will almost certainly result in a period of “over inflation” in the near future to get the average up to a healthy two percent.
For investors, this looks like a perilous time to be liquid. Cash holdings are sure to underperform in the near future as the Federal Reserve inches closer to rate hikes, while bonds and securities will get the biggest boost. Portfolios set up for long term growth will see the greatest benefit, but portfolios intended for short-term goals (such as money market accounts or CDs) appear to be a poor investment.
If that’s worrisome, the good news is that over-inflation will not likely last very long. Unfortunately, there’s no way to know how long Yellen’s misguided views will remain in place.
Regards,
Ethan Warrick
Editor
Wealth Authority
