Tuesday, January 5, 2021

Best Evidence Top Federal Reserve Officials Have No Clue

Loretta J. Mester, President and Chief Executive Officer of the Federal Reserve Bank of Cleveland delivered a speech at the Allied Social Science Associations Annual Meeting (via videoconference). Here is her remarkable comment on price inflation in the talk:

I expect this post-vaccination phase of the recovery to continue over the next few years, with growth above trend, declines in the unemployment rate, and gradually rising inflation...Nor would the strengthening in growth I expect to see later this year necessitate a change in our policy stance because I expect that the economy will still be far from our employment and inflation goals...The economy’s intrinsic dynamics suggest that inflation is not going to move up quickly above 2 percent. 

At the same ASSA meeting,  Chicago Federal Reserve President Charles Evans said:

It likely will take years to get average inflation up to 2 percent, which means monetary policy will be accommodative for a long time...The bottom line is that it will take a long time for average inflation to reach 2 percent.

This is the type of thinking going on in the Federal Reserve System.

It is absolutely stunning. They are simply looking at price inflation over recent past years and are making projections based on the recent past that price inflation will not spike above 2%.

This despite the fact that in 2020, the Federal Reserve increased the money supply by $4 trillion (an increase of 25% plus) and that asset prices from housing to the stock market to Bitcoin are soaring because of the massive money pump.

This climb in asset prices will very likely find its way in 2021 to consumer prices and the spike in consumer prices will be well over 2%. In the EPJ Daily Alert, I am forecasting price inflation will easily hit 3% this year and then 5% and possibly 10% within 18 months.

The Fed has no clue. By the end of 2022, I am going to have to update my book, The Fed Flunks: My Speech at the New York Federal Reserve Bank, with a new chapter pointing out the above failure of Federal Reserve officials to recognize the irresponsible money printing that they are now conducting.



  1. The phrase "inflation goals"...is that sort of like "infant-mortality goals" or "pollution-production goals"---?
    It should always and everywhere be replaced with "Dollar-devaluation goals," in the interest of truth-in-advertising.

    1. Agreed.

      But here's the problem: their long-term currency printing scheme is a good strategy for a massively over-indebted govt. Creditors lose and debtors win when they print. And there's no bigger debtor that the US fed govt.

      The plan won't last forever ... but they have been able to "kick the can" down the road longer than most of us thought they could.

  2. They are educated beyond their comprehension.

  3. The issue with this is the fact that The Fed/Uncle Sam can always play with the PCE and CPI baskets' inputs and weighting to produce a 2% (or lower) change. Governments can always put price ceilings in place that keep the $ price unmoved while choice and availability trend downward; these negatives aren't reflected in the PCE.

  4. They are "highly credentialed," not "highly educated." To paraphrase Reagan, the trouble with these folks is not that they're ignorant, it's just that they know so much that isn't so.

  5. But what else are they going to do given that the debts (funded & unfunded) are already far too big to ever repay. (BU prof Laurence Kotlikoff estimates the fiscal gap to be over $200T.)

    As bureaucrats and political types, they really don't have much of a choice.

    They can either default on much of the debt honestly (not politically palatable) or do a slow default via inflation. And when it gets out of control, they will say, "nobody could have seen this coming" and they will blame it on foreigners, the weather, and the other usual scapegoats.

    One last point, I suspect some of them realize what Keynes said over 100 yrs ago, "[t]here is no subtler, surer means of overturning the existing basis of society than to debauch the currency."

    In other words, perhaps some of them won't mind when the market causes economic reality and things implode spectacularly, as they can then try and use the crises to impose their preferred means of organizing society (e.g., socialism).

    Mike C.
    Spring TX