Monday, October 27, 2014

This is How Fed Monetary Policy is Being Driven

Chart of M2 money supply, quarterly change from a year ago,

Fed money supply growth is always quite erratic. And the last 10 years have been no exception. Is it any wonder that the economy appears to be on some kind of roller coaster?

Benn Steil and Dinah Walker at the Council on Foreign Relations highlight how erratic thinking can be among Fed officials:
St. Louis Fed President James Bullard continues to burnish his reputation as the FOMC’s least predictable member, reversing course on policy for the second time in 3 months—going from dove to hawk and now back to dove again.  Having as recently as August publicly advocated a rate rise in early 2015, he is now calling for the Fed to halt its monthly taper of QE3 bond purchases, citing falling inflation expectations.
But the Fed’s own preferred measure of inflation expectations, the 5-year 5-year forward breakeven inflation rate, has barely moved since the FOMC’s September meeting—down from 2.4% to 2.3%....Bullard has always defended his policy calls as data-driven, but in this case he seems to be navigating more by gut calls as to where the data may be moving in the future.  
For a complete discussion of how these manipulations distort the economy and cause the business cycle. see:  Austrian School Business Cycle Theory by Murray Rothbard

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