Article Image

IPFS News Link • Federal Reserve

When They Start Praising the Fed, You Know We're Headed for Disaster

• http://www.thedailybell.com

The Fed's Amazing Self-Fulfilling Forecast … The Federal Reserve's track record of economic forecasting is a lot better than many observers recognize. It might also offer some insight into the central bank's approach to managing the recovery.  -Bloomberg

This Bloomberg article makes the point that the Federal Reserve is competent.

Worrisomely, such articles tend to appear at the top of the business cycle. For proponents of central banking any gradually, sustained upturn is an excuse to celebrate central bank supervision.

This sort of propaganda is endlessly present at Bloomberg. Let the last cyclical economic disaster finally begin to fade from memory and Bloomberg columnists proclaim Fed competence once again.

In fact, we would have a hard time recalling when the Bloomberg editorial section criticized the central bank paradigm itself.  They are much more apt to either minimize Fed power (so as to make the facility more palatable) or in some sense endorse it.

This article argues that starting in 2011, the Fed brought policies in line with action and its handling of the economy became far more competent.

More:

From 2011 through 2015, the Fed managed the economy with two complementary goals: Get the unemployment rate down to 5 percent (from near 10 percent) and keep inflation in a range between 1 percent and 2 percent.

It adjusted monetary policy in response to shocks in order to achieve these complementary goals. In other words, the forecast for unemployment and inflation was accurate because the Fed made it so.

This raises another question: Could the Fed have achieved better growth and gotten interest rates back up to normal more quickly if it had aimed for a sharper decline in the unemployment rate and allowed inflation to run above target?

The basic thrust of these observations is that Fed officials finally figured out the right approach to the economy after fumbling around.

What would that right approach be? Presumably aggressive easing using such unusual methods as "quantitative easing."

The article also provocatively if the Fed might have run the monetary engines even harder to  create more jobs. Answer: This question will be studied for years to come.

No, it probably won't. Once the next crash comes, probably sooner rather than later, Fed "management" will be revealed for the disaster it is. Short term arguments for Fed competence always come unstuck.

These are cyclical arguments in fact.

They usually occur toward the top of whatever bubble the Fed is currently engaged in blowing.

We remember articles during the Greenspan era proclaiming that the Fed had basically abolished the business cycle. Then 2001 happened.