The Fed has the wrong metaphor
The central bank sees itself as a pilot. In reality, it’s a fire-starter
The average American family is now spending $3,000 more per year for food and fuel, according to analyst Ed Yardeni. That is, households have $3,000 less to spend on other consumer goods and services, which are also seeing rapid price rises. There are some 400 Ph.D. economists on the Fed payroll. Did any of them foresee the obvious consequences of printing up trillions of dollars’ worth of new money? Apparently not. Did any of them mention that it would make most Americans poorer?
But wait. Their job is not to speak truth to the powerful Fed governors, but to protect them from it. Armed with jackass theories and overblown conceits, they stand guard at the temple door. Fed governors are untested by the give and take of real-world commerce, uninstructed by the bid and ask of a real market economy. And with their own back-up team of like-minded Ph.Ds on the job, they never have to get a real job, never have to mingle with real businessmen, or sup with real investors. Their imaginations are thus free to believe whatever they want, no matter how absurd. They believe, for example, in the idealness of 2% inflation (a total fantasy, supported neither by theory nor experience). They believe in the doctrine of data dependence (otherwise known as “driving by looking in the rear-view mirror”), which is how the Fed ran into 9% inflation. “Who could have seen that coming?” they ask one another. But Fed governors were almost the only ones who didn’t see it coming.
Fed governor Loretta Mester, for example, has no idea whether inflation is coming or going. She favours halfpoint interest-rate increases, reports Bloomberg, but would support bigger rises later if inflation doesn’t ease by the second half of the year. That’s “data dependence”. You spend your whole career on the Fed payroll, pretending you know what you’re doing, then when it becomes clear you’ve made a mess, you try a little rate rise to see what happens!
The problem is the metaphor. Fed governors see themselves as the press portrays them – expert pilots tasked with bringing the giant US economy down to earth without spilling a single drink in the firstclass section. But not everything is as simple as flying a plane. A better metaphor is that the Fed wanted to liven up the party. It wanted higher rates of inflation. So, to get people moving, it set fire to the house. That was fun for a while, the flames gaily dancing in the living room, a warm glow in the parlour. But now the blaze is out of control. Instead of 2% inflation, it got almost 9%. The challenge now is to put out the conflagration without damaging the furniture. It tossed a glass of water towards the flames last week. Next quarter, it may try another 0.5% rate increase. Then maybe another spritzer in the third quarter. Until, still looking in the rear-view mirror, finally, Mester sees the house burnt to the ground.
“The Fed has tossed a glass of water on the conflagration it started”