8 times a year, a froth of frenzy stirs up in the financial press, just as the Federal Reserve’s policy making arm, the Federal Open Market Committee (FOMC) prepares for its rate setting ritual. All matters technical are discussed very conventionally: Taylor Rule, minding the gaps in that rule for inflation and output, what and what not to say and how to say what needs to be said about inflation against what measure and about inflation expectations.
Some empathy is displayed vis-à-vis the unemployed by all those gainfully and highly encouragingly employed at the Federal Reserve for saying the right things, such as structural or cyclical, about unemployment. Three weeks after that, similar to a missed period, the FOMC releases its minutes saying a lot without saying anything about an economy that has not been conceived despite the great efforts to fertilize, waiting for monetary policy to act with a lag. It often turns out that the cycle is uneven. It may be time to visit the doctor for some in vitro interventions.
In a really deflationary economy, the Fed is getting concerned about inflation because its rate is low, still close to zero. The borrowing costs hitting investors are high and because the real repayment costs are high (approximately negative of the inflation number) the investors do not want to invest in the domestic economy.
The government has cut taxes for the middle classes who consume and do not invest but cannot benefit from those tax cuts until they earn enough and is raising them on the investor classes. It gave tax incentives (instead of corporate tax cuts) toward targeted investments whose job creation potential is not able to compensate for all the millions of lost jobs. So, once the rusting bridges and the pot holes are fixed, the money may run out until new pot holes have to be dug to be filled as the country watches large projects that can create many jobs happening in far off lands such as China to fund road another round of road repairs in the United States by buying more American debt.
As China and India create jobs and grow, and Brazil begins to prepare for the Olympic Games in 2016, inflation will keep rising and at some point, in spite of all the Fed’s gymnastics with statistics about inflationary measures. At some point rates will have to rise is the current watermark of a chorus out of the Fed which, similar to the Doppler Shift of a distant train coming closer, will rise in intensity as time goes by.
The Federal Reserve’s statutory independence gives it the cover of the veil to keep its policy translucent. This diaphanous discretion of the Fed’s policy makers could at times hide ugliness rather than beauty when the winds of economic change blow the veil off the face of the economy, unless that veil is always preemptively lifted for the people to get what they see. As the first order of business, the Federal Reserve must institute an explicit inflation targeting range, letting the markets know in no uncertain terms how much inflation it is willing to tolerate.
The Fed has already done much in this crisis, in the way of getting creative about opening the monetary fire hose into a black box. But that has not helped enough as if the fire washed out more jobs than it had created. So, it may be time to get in the helicopter while also getting down on the hands and knees to get dirty to repair the monetary plumbing. The banks need the money and the economy needs investment.
The Federal Reserve has an existing program to restart the securitization market and it must extend it down the financial food chain to feed the hunger for healthy securities with healthy underlying loans. The Fed only needs to direct the banks to which it provides the monies to clean up their books to ensure they make the needed loans for the needed investments before those can be turned into securities.
The Fed can print plenty of money, year after year, to enable the markets to fund projects big and small of which there is no scarcity, because the United States has so much debt out there sticking like flypaper to its books, making them heavier as days turn into months and months into years, before a straw could break the camel’s back of both the debt and the dollar, on another quiet September 11th morning which may not be as spectacular as the last one.