Home U.S. Economy Fed’s Dangerous New Strategy: Project Syndicate

Fed’s Dangerous New Strategy: Project Syndicate

Fed’s Dangerous New Strategy: Project Syndicate
Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington DC on June 13, 2018. - The US Federal Reserve raised the benchmark lending rate on Wednesday, the second increase of the year, and signaled two more hikes were coming in 2018 and four in 2019, a possible sign of concern about accelerating inflation. (Photo by ANDREW CABALLERO-REYNOLDS / AFP) (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images)

NEW YORK – On August 27, the US Federal Reserve issued a press release summarizing updates to its longer-run goals and monetary-policy strategy, and Fed Chair Jerome Powell discussed the revisions at greater length in a speech later the same day. The two documents are a collection of type I and type II errors. If the Fed were to pursue the new strategy determinedly, it could inflict real economic damage on the United States and the world.

Let’s begin with a minor error of omission. In his speech, Powell referred to the Fed’s congressionally mandated goals of maximum employment and price stability – omitting, as is the norm, its third congressionally mandated objective of moderate long-term interest rates. The obvious tool for managing long-term rates is yield-curve control, but the policy-setting Federal Open Market Committee (FOMC) does not mention this instrument even in the context of pursuing maximum employment and stable prices.

But the real trouble starts with the FOMC’s reinterpretation of “maximum employment.” The press release states that the committee’s policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The FOMC’s original strategy statement, adopted in 2012, referred to “deviations from its maximum level.”

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