Shades of Humphrey-Hawkins

In what was probably Keynesianism's last gasp, Jimmy Carter signed a piece of legislation on October 27, 1978 called the Humphrey–Hawkins Full Employment Act.  Essentially, Humphrey-Hawkins made full employment the required primary goal of Fed monetary policy.  Hubert Humphrey was dying of cancer—he would only last until January.  So even though Carter was the first neoliberal Democrat, he cynically signed the bill as a nod to a dying lion of liberalism knowing full well he would ignore it.  And then soon enough, Reagan would become president and then Humphrey-Hawkins was really ignored.

So after 35 years of central banks making price (wage) stability their sole focus, we have a Fed chairman who is at least pretending that unemployment is legally one of his concerns.  He is discovering two truths: 1) The forces that made inflation-fighting the only goal of central banking policy are well entrenched to the point where their opinions are accorded the status of convention wisdom, and 2) Slowing growth is at least 100 times easier that stimulating growth.  The old Keynesians called this second problem "pushing on a string."

Listen to the Fed: Unemployment Is the Real Problem

William Greider, December 13, 2012

Forget what you read in the newspapers about the “fiscal cliff.” The real showdown in Washington is not between Democrats and Republicans. It is the bizarre collision between self-righteous politicians of both parties promising to shrink government spending and raise taxes, while the supposedly independent and nonpartisan Federal Reserve pleads with them to stop before they totally wreck the economy. What threatens to take the country over the cliff is the political momentum of the establishment’s wrong-headed propaganda.

The mild-mannered Fed chairman Ben Bernanke is standing in the way, but nobody important seems to take him seriously. Though not given to inflammatory rhetoric, Bernanke is virtually standing in the middle of Pennsylvania Avenue, waving his arms and screaming at the lawmakers. Turn back! You are heading in the wrong direction. Don’t you understand? The real economic problem is not too much government debt. It is too few jobs!

This message was again delivered by the Federal Open Market Committee at its meeting this week when it formally declared job creation as its central objective. The Fed hopes to stimulate employment by keeping interest rates near zero and pumping many more billions into the economy—at least until the unemployment rate falls to 6.5 percent. Fed officials, however, do not expect that to occur before the end of 2015.

Three more dreary years ahead, further weakening economic fiber and national spirit. The Fed chairman described the persistence of mass joblessness as “a waste of human and economic potential.” At his press conference, Bernanke allowed: “If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that.” If Congress and the president allow the huge downshift in government scheduled for January 1, Bernanke warned: “We would try to do what we could…but I just want to again be clear that we cannot offset the full impact of the fiscal cliff. It’s just too big.”

In these circumstances, the Federal Reserve is a weak reed to lean on. It is essentially attempting to stimulate lending and spending in the private economy by altering the “expectations” of investors and business managements. By assuring those decision makers they can count on very low rates and easy money conditions for at least another two or three years, the Fed hopes this will create a bigger appetite for risk-taking. Maybe so, but skeptics are plentiful. The Fed’s extreme policy of easy money has been in place for nearly four years and it hasn’t worked yet.

After the crash of 1929, the ineffectiveness of monetary policy was disparagingly described as “pushing on a string.” Bernanke’s Fed is at risk of acquiring the same reputation.

Banks and business corporations are sitting on trillions in surplus cash and bank reserves, making handsome profits while the real economy languishes. Yet the Bernanke Fed has so far declined to take bolder actions. Financial manipulations are the orthodox response of central bankers, but real investment remains limp or nonexistent. If political leaders dared to engage genuine debate on the economy, they would embracing bigger spending plans themselves and lean hard on the Fed to take more concrete measures like direct lending to the real economy or regulatory pressures to force open the bank credit channels.

For now, the country is preoccupied with a phony crisis that might please some bookkeepers but will do nothing to jump-start a stronger recovery. The Obama administration has tried to have it both ways—devoting lots of political energy to the debt and deficit problem, not so much to the larger ailment of economic weakness. I think we are witnessing the hangover from thirty years of conservative idolatry—the political worship of so-called free markets and deregulation. Democrats are infected too—either afraid to propose aggressive measures or ignorant of what is possible in crisis. The bean counters are still in the saddle. They may be dislodged only if the country is driven into another bloody recession.

Where is big government when we need it? more

Here we see a professional money-changer pointing out how futile Bernanke's attempts at economic stimulation really are.  Factually, he is mostly correct.  Where Roberts goes wrong is that he believes Bernanke is wrong to even try.  He need not worry—Bernanke is not especially enthusiastic about stimulation and the economic laws of gravity are working against him.

That Federal Reserve May Have Finally Found The Limits Of Its Effectiveness

Lance Roberts, Street Talk Live | Dec. 14, 2012

The Federal Reserve meeting for December came with few real surprises. The two important actions that were eyed by the financial markets were the pledge to continue artificially suppressing interest rates and the extension of monetary actions. Both of these goals were met.

While the Fed had already entered into a third Large Scale Asset Purchase program (QE 3) in September, which purchases $40 billion each month in mortgage related securities, they also announced of an additional program (QE 4) to replace the expiring "Operation Twist." Unlike "Operation Twist" which used maturing securities to purchase new holdings - the new program will be an outright monetization program of $45 billion each month of Treasury bond purchases. This will bring the total purchases of fixed income securities by the Fed each month to $85 billion.

However, the Fed did make a very significant change in its policy stance in December by implementing the "Evans Rule" and linking their monetary policy actions to specific economic targets. From the Fed's release:

"To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."

The problem, of course, with setting specific targets for employment and inflation, in terms of monetary policy actions, is that reported levels of employment and inflation can be materially different than real employment levels and inflation.

However, what was overlooked by much of the media was the release of the Fed's economic outlook and forecasts. In past articles I have discussed the problems with these forecasts (see here and here) and why they are not an accurate prediction of what the Fed really thinks. To wit:

"The problem for the Federal Reserve is that they face a severe challenge, when communicating to financial markets and media, which is the creation of a self-fulfilling prophecy. Imagine that following an FOMC meeting Bernanke stated: "The policies and actions that we have implemented to date have done little to curb economic weakness. The economy is in much worse shape that we have previously communicated as the transmission system of Fed policy through the economy, and the financial markets, is obviously broken."

The immediate reaction to such a statement would be a complete meltdown of the financial markets. Such a decline in the financial markets would negatively impact consumer confidence which would subsequently throw the economy into a recession. Therefore, communication from the Federal Reserve must be very guided in its approach - not too hot or cold. This "goldilocks" approach works to create a "glide path" to the Fed's destination while giving the financial markets and economy time to adjust to the incremental adjustments to forecasts. Therefore, when the media reporters grab onto a sound byte that the 'next year is going to very good' it should be taken within the context of the trend of the economic data and what is driving it."

The Fed has been slowly guiding economic forecasts lower since 2011. The reality is that the long range forecast of 2.6% economic growth is not a boon of economic prosperity, corporate profitability, increasing incomes or a secular bull market."  more