The minutes of the December 16-17 Federal Open Market Committee meeting offer some hope that the Fed is finally getting over its seven-plus years’ worry that the U.S. runs the risk of falling into a deflationary spiral, similar to what we encountered during the Great Depression of the 1930s.
While deflation, or even disinflation, might be a legitimate concern now in Japan and the Euro Zone, the idea that we face a similar threat seems a little hard to swallow. Perhaps this was a real concern during the panicky days of the global financial meltdown in 2008, but even then it seemed to be a stretch. Now, seven years later, it just looks ridiculous.
According to the minutes of the December meeting, released last week, the Fed’s monetary policy committee brushed off the idea that inflation would remain below the Fed’s 2% target due to the declining price of oil, which it calls “transitory,” and remaining slack in the labor market.
“Participants generally anticipated that inflation would rise gradually toward the Committee's 2% objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated,” the minutes state. “Inflation was projected to reach the Committee's objective over time, with longer-run inflation expectations assumed to remain stable, prices of energy and non-oil imports forecast to begin rising next year, and slack in labor and product markets anticipated to diminish slowly.”
Yet, the minutes show, a number of FOMC members still see a risk that inflation “could run persistently below their 2% objective, with some expressing concern that such an outcome could undermine the credibility of the Committee's commitment to that objective. Some participants were worried that the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations, while others were concerned that the decline in market-based measures of inflation compensation might reflect, in part, that such a decline had already begun.”
Of all the things about Fed policy I just don’t get, its take on inflation – rather, its fixation on raising it – is by far the most perplexing. So it’s hard to understand what these “some participants” worried about too-low inflation are looking at – or even what country they’re living in.
Until the Fed started to tell us differently a few years ago, inflation has always been a dirty word. Inflation, no matter how low, was always bad. Most consumers view it that way; they always have, and rightfully so.
Indeed, when Congress amended the Federal Reserve Act in 1977, giving it a dual mandate to promote maximum sustainable employment and “price stability,” the latter was generally interpreted to mean low inflation. The amendment was enacted in response to the high inflation – then in the low teens – during the Nixon and Ford Administrations of the mid-1970s.
Now, since the debacle of 2008, the Fed has been telling us that inflation is simply too low, and we must do something about it. I’m not a trained economist, but I don’t feel I need to be one to know that makes no sense.
The argument that we somehow have to fear too-low inflation sounds eerily similar to recent worries that low oil prices are bad for the economy. That idea is just as hard to swallow.
Sure low oil prices are a problem if you’re in the energy business or live in an OPEC country, but for the vast majority of Americans low oil prices are a net positive, and a big one. As the recent issue of Bloomberg Businessweek notes, only about 2% of the economy comes from capital spending by the energy sector, “a drop in the bucket” of GDP, which, by contrast, is comprised of close to 70% consumer spending.
Normally, governments create inflation by simply doing what governments usually do, meaning they spend money they don’t have. With Washington spending as much money as it has the past seven or so years and the Fed helping by buying up a good portion of government debt, we should be grateful that inflation is so low. (But don’t count on it lasting; we’ll have plenty to worry about soon enough).
Just as big a problem is how the Fed defines and measures inflation. Exactly what numbers is it looking at to determine that inflation is as low as it claims?
The median U.S. household income is now pretty much where it was more than 25 years ago. Can we say the same about prices?
While gasoline prices have certainly come down recently and many other consumer goods have held steady, other things Americans spend most of their incomes on have gone through the roof, like state and local taxes and fees, higher education, health care and medical insurance, just to name a few. (It’s not a coincidence that they’re all government-mandated or -related costs). Doesn’t the Fed include any of those things in its inflation metrics? Or don’t these count?
The last thing we have to worry about is that inflation is too low, and it’s good to see that the Fed, or at least a majority of its members, is finally getting around to seeing that. Inflation will take care of itself, possibly sooner rather than later. Then the Fed will have a different battle to fight.
Visit back to read my article next week!
George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
My question is how many jobs are in government , and in private industry [paid by gov in separate bracket], conglomerates [paid by gov in separate bracket] ,
ie how many jobs are the producers paying to keep the non producers [bureaucrats & politicians ]
Since long long long period, FED has done only one job very successfully and smartly, and that is postponement of today's problem towards tomorrow, and tomorrow's problem for day after tomorrow.
Without taking any long term viewed steps, one can never solve long term relief. While Considering short term or imitate effects of Such Steps may found even too hard or harsh up to worst level, but they ensures to cure problem on permanent basis, with more and more smoothing process.
Unfortunately, not only FED, but all most Central Banks of majority countries never dare to adopt such "Short Term Pain Long Term Gain" Policies, because of pressure, they felt from Political Parties and various Business Lobbies. for which, Common Man or General Public bound to pay heavy and unbelievable cost, along with cumulative interest and penalty.
Rasesh,
Agreed. There was a time (early 1980's) when the Fed did what was right, not what was expedient. Today, it is a political organization, usually tied to the current party in power. It has no interest in much of anything except protecting politicians in power. Imagine Yellen using Volcker techniques and ramping rates to the mid teens!
Today, we get "sales" rates, and "GDP" growth rates by borrowing money at close to a zero rate which expands the term of the "good times", hurting the citizens.
All of the comments so far on the FED's behavior appear not to question some motives unfavorable to the US citizenry. It might appear that the FED's purpose is to perpetuate debt servitude for our Nation. What is this organization that Congress cannot audit and the People cannot know the stockholders of? I am reminded of President Andrew Jackson's comments in his veto of the banking bill which did away with the US central bank until 1913. In part he said, paraphrasing, "If such a corporation's stock fell into the hands of foreigners, as it may, wouldn't we have cause to tremble in time of war? Where would the allegiance of the fleet and armies be? " Lately, it might be concluded some Mid Eastern Potentates have directed the FED to conduct wars against their enemies in that region, against certain non secular Mid Eastern governments. We are not allowed to know who owns this banking cartel nor to whom they favor with loans & gifts of trillion$, all billed to the US Taxpayers, with interest and penalties. Questionable behavior, at best. But with unlimited funds to buy anyone and any thing, who dares question?
Below is the composition of the ownership of the Fed. It is essentially commercial banks.
http://www.factcheck.org/2008/03/federal-reserve-bank-ownership/
Inflation happens to be very necessary if you are in charge of a country that is bankrupt. This way America can pay off at least part of its debts and borrow more. This will push the ultimate bankruptcy into another. Its president term. Changing the subject I have written a book entitled Torah and Zionism? With the question mark there on purpose for those wanting to examine the issue objectively.
Mike,
Some good comments. I think inflation does hypothetically help countries pay off their debt, but that assumes (let's use Japan as an example) that the debt is reasonable compared to GDP. Since 2008, this no longer applies to the U.S. The debt is too high, and inflation (if it increased) is more likely to lead to our bankruptcy that anything else. At this stage, each 1 point change in interest rates would cost the U.S. about $180 million dollars, at some of the historic levels if would use up all individual tax revenue. We have passed the point where inflation helps us. This is BEFORE the impact on the declines in value of all of the Freedie Mae, Sallie Mae, Pension guarantee, etc. and other indirect holdings that the U.S. never counts. We have been a net debtor country since 1989, and we are speeding up the debt growth rate.
No one is saying anything about interest rates in this article. It is simply an article about the pros of inflation for the United states. However since you bring it up the reason the interest rates are so low is exactly like you mentioned. It would speed up the bankruptcy of the United states. However let me add that economic experts have been proposing since Nixon removed the USA from the gold standard the imminent collapse of the dollar. You may be interested in buying my book on Torah and Zionism for a bar mitzvah gift,
You bring up several very interesting concepts. I think the escape from Gold backing has led to a lot of our problems. There are signs that China may be going the other way, and in fact telling its citizens to buy gold and for the central bank to have great silver and gold backing........on the other hand, they may want to be the new reserve currency, and not waste the potential that we have wasted with "consumerism".
George,
We are not on the same page on a number of your comments. First, I think the 70% of spending is by consumers is a very old idea. We need to be doing the opposite today, and focusing on building things for export. We no longer have a rapidly growing consumer economy, it is all in other parts of the world (about 97% of it) and we have a growing group of citizens that have little or no savings for retirement. We need to be focused on savings, and building things for the global middle class unless we want to continue to double the National Debt every few years to provide "consumer money" for spending. We also need to focus on Entrepreneurship, since 2008 we have had a continuous decline in new startups, and lots of closings. with Small companies representing 65% of the jobs, we need to refocus a lot of our legislation on building new companies, rather than gift money from Government (everything seems to be free/ meaning borrowed) for consumer spending.
I am in complete agreement. What is most curious is the misdirection involved in describing what the Fed (and all the other central banks) have been doing- providing trillions nearly interest-free to the banks that own them- all the while solicitously claiming to do so out of fear of falling into deflation. It is taught in Econ 101 "Savings is the engine of investment," and yet savers have been sent to purgatory because of their greed, which extends now both to bail-ins as well as putting hedge-fund gamblers ahead of savers in the event of catastrophe.