Issues & Insights

Is The Federal Reserve Out-Of-Control?

Federal Reserve Board, Washington, D.C. Photo: Dan Smith, licensed under the Creative Commons Attribution-Share Alike 2.5 Generic license (https://creativecommons.org/licenses/by-sa/2.5/deed.en).

On its first page the New York Federal Reserve Bank has a paragraph that states in part that:

“The New York Fed stands in unity with all those who oppose racism, hate, and violence. We join them in a shared desire to root out the intolerable inequities and injustice grounded in systemic racism that persist in our society. We are firm in the belief that economic equality is a critical component of social justice and that we will never have the truly inclusive and strong economy we seek until access to health, education, safety, and justice knows no racial or other boundaries.”

The above sentences are full of assertions including the concept of systemic racism. No attempt has been made to justify that statement. Other Federal Reserve banks have joined in the push for equity including the Minneapolis, Boston, Atlanta, San Francisco, St Louis and Cleveland Fed Banks. One expects that the websites reflect the interests of the respective bank presidents.

Team Biden must be pleased with the New York Fed’s website. The White House website makes some of those same points. The New York Fed Bank and other Federal Reserve banks may have adopted a portion of Biden’s political agenda.

Economic equality, whatever that means, is not a goal of the Federal Reserve. The Full Employment and Balanced Growth Act of 1978 establishes price stability and full employment as national economic policy objectives. That act requires the Federal Reserve to conduct monetary policy pursuant to achieving these two goals, and to report to Congress on its conduct of monetary policy. That law was a fine-tuning of the 1913 Federal Reserve Act.

Economic equality is not mentioned in either the 1913 or the 1978 Acts. If Congress wants to mandate the Fed to focus on economic equality it should pass an updated Federal Reserve act. But until Congress does that, the Federal Reserve should focus on price stability and full employment.

The Federal Reserve is not meeting either the goal of price stability or full employment. Perhaps Fed leaders have decided that these goals are secondary to economic equality. If so, the Federal Reserve is out-of-control.

The PCE deflator, the Fed’s inflation measure, recently increased at 3.6% (y/y). This measure has been gaining speed since January of this year. The Federal Reserve adopted a new framework in August 2020. Its goal for inflation is 2% over time. Over time is not defined. Fed leaders appear to be ready to allow the economy to run hot or tolerate inflation well in excess of 2%, for some time.

It is hard to see how inflation in the 3% or 4% range is going to be beneficial for low-income Americans or how inflation of 3% or 4% is going to help reduce unemployment (currently at 5.8%.)

The recent JOLTS report had job openings at 9.3 million job openings. The latest BLS Household Survey listed 9.3 million people seeking a job. But Congress decided to pay people not to work which complicates reduction of the unemployment rate.

The unemployment rate was 3.5% in September 2019 and the PCE deflator was 1.4% (y/y). Full employment in the last administration may have been in the range of 3% to 3.5%. In the current administration full employment may have shifted up by one full percentage point in response to increased regulations, more benefits and higher inflation.

Stimulus by the Federal Reserve and Congress since February 1 of this year was likely not needed. The highly effective C-19 vaccines were what was needed. The Blue Chip Economic February consensus was at approximately 5% real GDP growth for 2021, which reflected the vaccine rollout. Supply was not in place to produce for a 5% GDP growth rate much less a 7% growth rate. The additional economic stimulus since then has only fueled the fires of inflation.

Mike Cosgrove, principal at Econoclast, a Dallas-based capital markets firm, is a professor at the University of Dallas.

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