Friday, August 23, 2013

Even Keynesians Do not Understand the Fed

As Brad DeLong writes on his blog.....

There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.

Given the history of the past six years, right now I would expect the Federal Reserve Open Market Committee to have reached the conclusion that a CPE Deflator inflation target of 2%/year with no catchup after shortfalls is inconsistent with its accomplishing both parts of its dual mandate, and that it needs to shift to a 2%/year inflation target with level catchup, to nominal GDP targeting, or to a 3%/year or 4%/year inflation target in order to accomplish its congressional mandate.

Failing that, I would expect an FOMC to announce that the slow pace of real economic growth requires an acceleration of asset purchases, not a tapering.

Granted, Keynesian and money-printer should just be synonymous and there has not been a problem a Keynesian could not 'solve' with more money. However, there does appear to be a growing group of those suggesting that taper will not occur in September.

Even the Fed's Lockhart is concerned.


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