Ryan Avent on the Pointless Pain Caucus within the Federal Reserve
Ryan Avent:
Monetary policy: Not yet time to worry about inflation | The Economist: SHOULD the Fed be worried about rising inflation?... Tim Duy discusses... Luca di Leo rounds up statements.... The members of the Federal Open Market Committee that are worried about inflation are mostly basing their arguments on headline inflation figures (I say mostly, because Dallas Fed President Richard Fisher seems to be basing his views on his gut).... But the Fed tends not to focus on headline inflation. Yesterday, Mr Tarullo explained fairly clearly why that was the case—core inflation is a better predictor of future inflation than is headline inflation. Why? Because headline inflation is often driven by volatile and transitory components like food and energy, and because American institutions don't pass through headline increases to the extent that other economies do.... Is there any reason now to think that the Fed is allowing core inflation to get out of control? The answer is a resounding no.... It's certainly clear that inflation expectations are well in hand.... Inflation expectations are inching up. That's good! The Fed began QE2 in order to reverse a steady decline in expectations, and a rise in expectations reduces real interest rates, which helps to stimulate the economy. But the reversal of falling expectations has not translated into a jump in expected inflation. As you can see, 10-year expected inflation remains below 2%. Based on the data, there is no reason to tighten policy now.
What if the rise in food and energy prices turns out not to be transitory?... Robin Harding put that question to Stanley Fischer.... Fischer spoke plainly on the issue. He said it's impossible to know whether rising commodity prices might continue and the central bank can't make policy based on something it doesn't know.... [Y]ou tolerate rising energy costs until they're clearly feeding back into core inflation and inflation expectations.... America is nowhere near that point. A panicky response to below-target inflation is bad for Fed credibility and very bad for macroeconomic stability. This is why the FOMC members who matter are firmly behind a plan to stand behind full execution of the QE2 purchases...
The real game, of course, is that the economy needs nominal demand to catch up to its pre-2008 trend, and so we need a QE3..,
