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: How partisanship is infecting the Federal Reserve and experts’ views on monetary policy

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When economists are prominently associated with a political party and express opinions publicly, that affiliation should be a part of the story.

Today a lot of economists are lining up on the recession, no-recession forecast. It shouldn’t be a surprise that their views are correlated with partisanship. 

We have seen experts in health care and climate science exude opinions fueled by their politics using their reputations even when science did not justify the opinion they promoted.

Also by Robert Brusca: The Federal Reserve is shrinking its balance sheet under duress, which makes a soft landing nearly impossible

It’s a huge problem these days. How in the age of complicated issues do people make up their minds when “experts” are not fair with them? Do we really gain anything by retreating to our political news source of choice and seeing what it says? With all due respect to partisanship, partisanship is not about truth; it’s about loyalty.

Of course, economists — and I am one — have done this for a long time and are some of the worst transgressors. 

Don’t expect miracles’?

Princeton economics professor Alan Blinder, who was a vice chair of the Federal Reserve in the mid-1990s, said in the past week that the Fed had tools to fight inflation, but they were crude and maybe we should not expect too much from them. Really?

The exact quote is as follows: “Fed Chairman Jerome Powell and his colleagues would love to unclog supply chains, alleviate food shortages, and lower oil prices, but they can’t do any of those things. What they can do is raise short-term interest rates. That will help, but don’t expect miracles.”

What did he mean by that? We previously were told that the zero bound — the lowest level that interest rates can fall to— is a problem (deflation/zero rates) but that the Fed knows how to stop inflation. Now presented with that challenge, well, Blinder, at least, seems less than eager to take up the fight. Is it because he is a Democrat? Indubitably! 

When I read that, knowing Blinder’s politics, it reads to me like saying the Fed is not going to stomp out inflation. It will raise rates to try to deter and lower inflation (and cause the Fed to seem responsible in the process) but it will allow inflation to linger (that’s the “don’t expect miracles” part) rather than to reduce inflation to target expeditiously.

Conclusion: The Fed is more interested in avoiding recession than in stopping inflation (soon).

Don’t know much about history

Remember that we saw this sort of policy under Arthur F. Burns, who had political objectives and we know where it leads. It led to Jimmy Carter and then to Paul Volcker.  

The Fed has made a deal with the devil over full employment, and now that deal will keep the Fed from having success in its inflation fight. The Fed used to resolve its dual mandate — which is not a new mandate despite the way Chairman Jerome Powell seems to present it — by saying it does the most it can for full employment by keeping inflation low. We saw that in action through 2019 and early 2020 when unemployment touched 3.5%.

Life in the too-fast lane

Then, later in 2020, the Fed, under pressure from progressives, buckled after having botched policy from 2016-2018. The Fed was vulnerable to the charge that it was overly pre-emptive in that period. (And it was! It had hiked rates based on its own forecasts and ignored incoming benign inflation data.)

And now we have this mess. The Fed now has a short-term employment objective, apparently: Full employment all the time — sounds like a line from an Eagles song: Life in the too-fast lane. 

How else can you handicap this?

Some goals are ‘more equal’ than others

The Fed has two goals: full employment and average inflation of 2%. Right now, the inflation rate is way above target and the unemployment rate is below what most economists call full employment — the fed funds rate is still pathetically low.

What is the Fed doing in response? Carefully, slowly, going after inflation with delayed, measured rate increases, while protecting what is already too-low unemployment. (I began working at the New York Fed in 1977 and was a Fed-watcher in the 1980s, so pardon me If I don’t see a 50-basis-point rate hike with inflation at 8% as “aggressive.”)

Does the Fed’s approach make sense? Is it “fair minded”? No. It is biased and slanted. It is politically motivated. It will allow inflation to linger. It may even make getting inflation back to 2% more difficult.

Inflation will not be going back to 2% at all, on average or not. Not with the Fed’s new 2% average and promise to let inflation run hot for a while, to make up for too low inflation but no promise to run policy to make up for too-high inflation. That target has just become a piece of Fed P.R. It is no longer either real or realistic. When 2% is an “average,” it is not a number anymore; it is a statistic. And we all know about the veracity of statistics.

I like Powell. I’m glad he was reappointed. But I think we paid too great a price for the reappointment.

The Fed needed to protect its independence more than to fail to admit it made a policy error. It needed to show determination to do better — at the time economic performance, in fact, was still quite good despite the Fed’s misstep.

Fed policy helped to bring a 3.5% unemployment rate to the table, and still the central bank was vilified. There was no need to bend to the will of progressives on a new policy framework unless there was the quid pro quo of reappointment hanging in the air.

The Fed’s new pledges and policy framework are nothing short of policy disaster — at least as long as progressives hold sway in Washington. A central bank that will not fight inflation aggressively is not going to be a very successful central bank.

Robert Brusca is chief economist of FAO Economics.

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