Friday, February 22, 2019

Ben Bernanke Makes New Crazed Call For More Price Inflation

Painting by Salvatore Dali
By Robert Wenzel

Former Federal Reserve chairman Ben Bernanke is out with a new essay at his Brookings Institute blog,Evaluating  lower-for-longer policies: Temporary price-level targeting.

In his comment, he argues there is a benefit for the Federal Reserve to overshoot its 2% price inflation target.

It should be noted that the idea of any target price inflation rate is on shaky grounds in the first place (See: Volcker Questions 2% Price Inflation Target). But Bernanke ignores this and plows along with this odd justification for even more price inflation.

He writes:
A number of scholars and policymakers have proposed ways the Fed might conduct monetary policy to reduce the costs associated with the ZLB. The basic idea motivating many of these strategies is that promises by the central bank to keep rates ‘lower for longer’ can help reduce longer-term rates and encourage spending today, even when further cuts in the short-term interest rate are not feasible. In a previous blog post and paper, I proposed one variation of this kind of commitment, called “temporary price-level targeting” (TPLT). In brief, under TPLT, following adverse shocks to the economy that force short-term rates to zero, the Fed would commit in advance to avoid raising rates at least until any shortfalls of inflation from target during the ZLB period had been fully offset. So for example, if the Fed has a 2 percent inflation target in normal times, under TPLT it would commit not to begin raising rates from zero until average inflation since the beginning of the ZLB period was at least 2 percent. (Once rates have lifted from zero, policy is guided by a conventional rule such as a Taylor rule.) Since inflation early in the ZLB period would likely be below 2 percent, meeting this condition would typically involve some overshoot of the inflation target before rates were raised. Some willingness to accept temporary overshoots of the inflation target is typical of lower-for-longer strategies...

In sum, the figures suggest, and our paper confirms in more detail, that lower-for-longer strategies, like TPLT, can work even if the Fed’s commitment is not fully credible outside financial markets. Affecting financial-market expectations is enough to get extra stimulus at a time when it is greatly needed, even if households and businesses do not pay attention to Fed announcements. However, the possibility that a period of higher inflation could lead to an un-anchoring of inflation expectations by households and businesses implies that lower-for-longer policies must be carefully calibrated to avoid excessive overshoots of inflation at the exit from the ZLB. In the case of TPLT, shortening the inflation lookback period appears to achieve an appropriate balance of avoiding inflation overshoot while still benefiting from additional stimulus during the time when the economy is at the ZLB.
In short, this is monetary Keynesianism as if it were designed by Salvatore Dali. It has nothing to do with reality. Federal Reserve interest rate and money supply manipulation have nothing to do with real growth. As explained by Austrian school business cycle theory, Fed manipulations do nothing but distort the capital structure of the economy.

Whats more, as can be seen by the chart below, price inflation as measured by the Fed's favorite index ( Personal Consumption Expenditures Index), has been for extended periods below the 2% target (red line)--at times even negative.

Thus the price inflation "Bernanke deficit," depending upon how you calculate it, is on an annual basis of somewhere between 0.4 to 0.5 below the target or roughly a full 4.0% to 5.0% shortfall for the full period of what Bernanke claims is zero bound interest rates. That is, based on Bernanke's wacky price inflation "make-up" policy, if he were consistent, he would have no problem with a year of 6.0% to 7.0% price inflation (target price inflation of 2% plus the "make up" price inflation).

Of course, in his Dali like models, he assumes that the price inflation would never climb above 2.5%.

This is pure academic madness from a guy that missed the 2008 financial crisis at a time it was easy to see it coming if sound theory was used (See: The Fed Flunks: My Speech at the New York Federal Reserve Bank).

As I am warning in the EPJ Daily Alert, there is no basis to the idea that price inflation has to continue at the current mild trajectory, at any time, and it is likely, we could easily see price inflation spike to the 3% range and then the 5% range---and following such an advance it is going to be very difficult to kill the price inflation beast.

But Bernanke and others appear to fail to understand this and, thus, we are getting more and more monetary Keynesians supporting this "make-up" price inflation idea, including the very important policy influential President of the |New York Federal Reserve Bank, John Williams.

In a recent speech at the 80th Plenary Meeting of the Group of Thirty, Federal Reserve Bank of New York, New York City,  Williams said:
 “[A]verage-inflation targeting,” whereby the central bank purposefully aims to achieve an above-target inflation rate in “good” times when the lower bound is not a constraint.  Properly designed and implemented, such an overshoot can offset the inflation undershoot during “bad” times so that the longer-run average inflation rate and inflation expectations are in line with the target.
Bottom line: It is not an overstatement to call these people mad. There is no sound reason for any Fed monetary manipulation or price inflation targeting of any kind, never mind "average inflation targeting."

These type of policy proposals are just a notch above snake oil salesman but significantly much more dangerous because they are rubbing their oil across the entire economy.

Robert Wenzel is Editor & Publisher of and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.

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