The Federal Open Market Committee (FOMC) issued its monthly statement today. It reads a lot like the European Central Bank's (ECB) monthly statements: it begins with the admission that the economy is still stuck in a ditch, and then says that it will continue to do what it has been doing for the past five years. The committee has its foot way down on that gas pedal, but the speedometer still reads zero.
Here is the latest telemetry:
Nominal growth: 2.9%
Real growth: 1.4%
Core inflation: 1.1%
M2 growth: 6.8%
Divisia M4 growth: 2.3%
10-year yield: 2.5%
Growth rates are percent change from year ago, not annualized quarterly rates.
The economy is running at stall speed. Historically, nominal growth below 3% has led to negative real growth. The Federal Reserve’s monetary stance is contractionary, despite what Fed Chairman Ben Bernanke may say to the contrary. Inflation at 1.1% is 30% lower than when Bernanke was sounding the deflation alarm a decade ago.
This is what Bernanke said about the BoJ in 1999:
“I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections-objections which, I will argue, could be overcome if the will to do so existed. My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism...There is compelling evidence that the Japanese economy is suffering from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.”
I hope that Janet Yellen hasn't been getting her Kool-Aid from the same deflationary fountain as Bernanke. We can't take another five years of the Fed's complacent dereliction of duty. As Bernanke taught us, the only way to stimulate aggregate demand at the zero-bound is with inflation. What this country needs is 4% inflation, not 1%.
Now, for an insight into the Alice-in-Wonderland mentality of the FOMC hawks, here is Governor Esther George’s dissent from today’s statement:
"Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."
George is the president of the KC Fed:
"Ms. George joined the Bank in 1982 and served as a commissioned bank examiner until 1995, when she was named to the Bank's official staff. She has held numerous leadership positions at the Bank within its research support, public affairs, and human resources functions. She served as first vice president of the Bank from August 2009 until her appointment as president."