The Fed’s Southern Cross


This is the first of many posts on policy makers that have spread and continue to spread the fear of inflation or other concerns rather than addressing the very real and pressing issue of a weak job market.

Richmond Federal Reserve President Jeffrey Lacker has continually expressed fears of out of control inflation in the past throughout his term, and the Fed continuing to undershoot their targeted inflation has not persuaded him to abandon his inflation paranoia. He continually has advocated for inappropriately tight monetary policy dictated by his almost universally wrong inflation forecasts. In a  July speech in Charlotte, NC the public got a revealing look at the mind of where all Fed roads bend towards excess inflation:

“The outlook for inflation is also quite important to us, since, as I noted earlier, monetary stability has always been the Fed’s primary mission. The Federal Open Market Committee is on record as stating that its goal is for the price index for personal consumption expenditures to rise at an annual rate of 2 percent. Many observers expressed concern last year that inflation, at about 1 ¼ percent, was running well below the FOMC’s target. Inflation has averaged 2 ½ percent over the last three months, however. While the inflation numbers will often run hot or cold for several months at a time, the latest numbers suggest that inflation has bottomed out and is moving toward the Committee’s target. I expect that firming trend to continue this year.” (Italics ours)

This assessment seems reasonable at first glance, but contains an astoundingly fundamental error. When looking at personal consumption expenditures (PCE), the measure the Fed uses when creating policy relating to inflations, we can see that PCE has not exceeded 2% in 2014. At its peak, so far this year, in May PCE (without food and energy) grew at 1.5% and PCE (with food and energy) grew at 1.6%. Lacker would have to use CPI to get over 2% and even then it did not get to the 2.5% that he states in his speech. He overstated the PCE by more than 50%. This would be like a NFL coach believing his team had won a game 30–24 where they had in fact had lost 24–20. No wonder President Lacker has continued to damagingly wrong for years on end—in his mind, he’s been right all along.

In this way, President Lacker, you have won the uncoveted Crosby, Stills, and Nash monetary policy award—you never fail to fail. Here’s hoping in the future you choose to reconsider your path. If you don’t, you truly will remain a Southern Cross at the Federal Reserve.

(Image via Richmond Fed)


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