ATLAS STUMBLES — Inequality and Macroeconomics at a Crossroads

Dear colleagues,

Here’s a news flash: “We don’t want a boom-bust situation.” If you’ll pardon the cynicism, Janet Yellen has chosen now, the twilight of her time at the Fed to discover the words and wisdom of Ludwig Von Mises, father of the Austrian economic school of thought, detractor of the perils of malinvestment? Now?? More to the point, it’s a real trick to not want something we’ve had for over 30 years.

As for being flummoxed on stubbornly low inflation, as Yellen contends, that in 2017 inflation is “more of a mystery” than ever, allow an outtake from Fed Up to shed some light. For the record, Janet Yellen was in attendance at the 2014 Federal Open Market Committee (FOMC) meeting at which the following scene took place.

“Anything but bashful at his first FOMC meeting, Governor (Stanley) Fischer asked why the Fed relied on the core personal consumption expenditure (PCE) measure of inflation.

Fischer said he lived his life by the Consumer Price Index (CPI), as did his children. In his opinion, the only realistic measures of inflation were the CPI and the Dallas Fed Trimmed Mean PCE. (I bet Fisher got a kick out of that, since this relatively young metric had been nurtured under his leadership.)

One brave Fed staffer explained that the models the Fed used to set interest rates wouldn’t function if they didn’t use PCE. The no-nonsense Bullard jumped in.

“Let me get this straight,” Bullard said, according to a Fed official who was present. “Crap in, crap out? That’s how we make policy?”

It’s the model. It’s broken and it has been for years. Stop using it. Mystery solved. Next?

On this Fed Meeting Minutes Wednesday, now that we can safely speak of the end of the Yellen (Greenspan, Bernanke) mega-era, could we please petition Jay Powell and the new regime to stop doctoring the minutes from FOMC meetings in an effort to herald honest and true ‘transparency’ in future Fed communique?

After all, it was Yellen herself who brazenly called for manipulating the minutes, in recorded Fed transcripts, no less. She had this to say at the December 2008 meeting at which policymakers voted to take the fed funds rate to the zero bound: “We could also consider using the FOMC minutes to provide quantitative information on our expectations.” Could ‘we’ not instead?

 It goes without saying that Jay Powell, a man I optimistically call, “A Quiet Leader,”  has his hands full. Reclaiming independence and vanquishing failed policies will not be easy tasks. As for conventional policy, the markets are pricing in a 60 percent probability that that the fed funds rate will be at 2% by March, even as the yield curve flattens to such an extent that a half a percentage point of tightening could suffice to invert the curve. A narrow needle to thread indeed.

Be that as it may, rise to the challenge Powell must. The alternative, more of the same that foments deeper inequality, is simply too risky at this tenuous juncture in history. Rather than cower at such grave words, fortify yourself with this week’s, ATLAS STUMBLES: Inequality and Macroeconomics at a Crossroads.

 Giving thanks and wishing you well,

Danielle

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