Inflation Virus Strikes Fed (Part 1) John Mauldin Thoughts From Frontline James Graff 732 500 MUTE NMLS# 1974758 Words Are Policy, Price Instability, Ideas Have Consequences, "One Hell of a Dilemma", The Unintended Consequences of Federal Reserve Policy, Advisors Mortgage Group, LLC - MBS Highways

John Mauldin: Inflation Virus Strikes Fed PART 1 Words Are Policy Price Instability Ideas Have Consequences "One Hell of a Dilemma" The Unintended Consequences of Federal Reserve Policy

Inflation Virus Strikes Fed

One little-noted aspect of central bank policy is how rarely “policy” happens. Officials at the Federal Reserve and elsewhere long ago learned how to achieve their goals without actually doing anything. Creating perceptions is often enough to modify people’s behavior.

For instance, if traders simply believe the Fed will intervene should interest rates go above or below a certain level, rates probably won’t breach that level, or even get close to it. No one wants to make the Fed pull its trigger. This is why central banks are so obsessed with“credibility.” They don’t want to actually use their monetary firepower, and they don’t need to use it as long as financial markets respect it. Their most-used weapons are just words.

We saw another example in late August when the Fed unveiled changes to long term monetary policy strategy. Among other things, they now say they will let in􀁼ation “run hot”for extended periods in order to achieve a 2% long-term average. Reasonable minds can differ on whether that’s a good idea, or whether the Fed can actually do it. But the Fed certainly wants us to
believe its new plan. We know this from the enormous effort placed on communicating it.

The problem is that one person’s “policy” is another person’s unintended consequences

.Today I want to argue that the unintended consequences from recent Fed “policy” changes,not to mention those initiated in prior decades, have been at the very epicenter of some of the national problems we have. The Fed would vigorously deny this course, but the results are plain for all to see.
We’ll begin with how some of my trusted sources view this Fed move. But first, I’ll let the Fed speak for itself.

Words Are Policy

You may have noticed a pattern recently. Jerome Powell’s speeches and media interviews usually coincide with some kind of signi􀁻cant policy move. I’m sure Powell gets all kinds of invitations. Not by accident, he accepts those he finds useful.
And sure enough, shortly after the Fed revealed its latest change, Powell was online to explain/defend it via his pre-arranged Jackson Hole virtual address.

Here is what the Fed itself characterized in a
press release

(https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm)

as “the more significant changes.”
On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its"assessments of the
shortfalls of employment from its maximum level." The original
document referred to "

deviations

from its maximum level." [One small word, so much meaning.]
On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of2 percent by noting that it "seeks to achieve inflation that averages 2 percent over time." To this end, the revised statement states that "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." [We’re going to have to unpack these words carefully. It’s hard to even begin with the variety of potential for negative unintended consequences in these innocuous words.]
The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past. [Am I the only one who is confused? They feel challenges from monetary policy caused by low rates that they have in fact engineered. It’s kind of like saying that adding water to gasoline poses challenges for the proper operation of your automobile.]

We’ll get into what all that means below. For now, savor the irony of a central bank explicitly admitting it “seeks to achieve inflation” at all, never mind the level. Central banks once sought to
stop inflation, not achieve it. Now generating it is the goal. Congress, which created the Fed, mandates that it create “stable prices.” In a kind of Orwellian twisting of language, the Fed now interprets the mandate to mean 2% inflation. That means the value of your dollar loses about half its purchasing power every 36 years.
At a minimum.
As we willsee, it can get worse.
No doubt aware of this, the Fed went to great lengths to explain itself.

Linked here
(https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategytools-
and-communications.htm)

CONTINUED...PART 2



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