Tuesday, February 7, 2012

Bernanke "Lawyers Up"?


I've noticed a change in the language that Fed Chairman Bernanke has been using in his latest communications.

For years now, the Fed's "Dual Mandate" has usually been described by economic pundits and the Fed officials themselves as "full employment and price stability".

But that has never been the actual language in the Federal Reserve Act.  The Federal Reserve Act reads as the following:
Section 2A. Monetary Policy Objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
So it has never been "full employment and price stability", (or even a dual mandate for that matter as it looks like a triune mandate to me and they're not meeting any of them).  It is "maximum employment", "stable prices", and "moderate long-term interest rates".

So I've noticed that as of their Jan 20th release on the report format of future path of policy interest rates, they put it this way:
Appropriate monetary policy, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.
Then in their regular FOMC release of Jan 25th they wrote:
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.
Then in the Chaiman's Congressional testimony last week this from Bernanke's opening statement:
following its January meeting the FOMC released a statement intended to provide greater clarity about the Committee's longer-term goals and policy strategy.1 The statement begins by emphasizing the Federal Reserve's firm commitment to pursue its congressional mandate to foster stable prices and maximum employment.
Maybe the Chairman has finally read the Federal Reserve Act.

Or the FOMC is changing it's approach to how it sees it's own fulfillment of it's statutory mandate as it relates to employment, and is now talking about what is termed by the FRA "maximum" employment, instead of the past used, more colloquial "full" employment phraseology.  I believe this word-smithing is a subtle part of a changing Fed policy towards "throwing in the towel" and it's acceptance of continuing high levels of unemployment.

This is a failed Fed Monetary Policy; and Bernanke should just stop talking about Fiscal Policy altogether as he has no lawful mandate wrt Fiscal and he continues to misinform Congress on the nature of U.S. Fiscal Policy which is leading to more apathy and indecision by Congress (as if they needed any prodding!)

12 comments:

Tom Hickey said...

The Fed is apparently realizing that all they can do is control the interest rate and that it is a blunt instrument for affecting the economy. The monetarist notion of the Fed controlling the economy by controlling the demand for money through the interest rate is effectively dead in the water, although many diehards don't seem to get that yet.

Peter said...

Enough to say that 10% unemployment constitutes "maximum employment". Remember: structural problems! Problem solved ;)

Anonymous said...

Tom, and Matt, there also seems to be a growing chorus of critics complaining that interest rates are too low. Could Bernanke's changed emphasis be directed at them?

Matt Franko said...

Right Dan that is another one lately you are right on there wrt IRs.

PIMCO's Gross had something on this in the FT this week.

Everybody is starting to hurt as rates have remained low. From senior citizen savers to public and private pensions to the free loading bankers and free loading so-called "money managers".

I also wonder if the external sector is complaining behind closed doors as their risk free USD gravy train has dried up too.

Maybe Bernanke is going to raise rates and he has to transition to a higher NAIRU to give himself cover... so this is part of the initial transition...

Bond traders who are long beware for now... these people are sinister and will stop at nothing.

Resp,

Tom Hickey said...

@ Dan K

Bernanke is still terrified about the housing market. He is not going to even think about raising rates, which would affect the carrying cost of mortgages, until the housing market is firmly recovering. Calculated Risk sees the bottom in, but others are not so sure.

Tom Hickey said...

I should expand on the above to explain. The Fed and FDIC are the only ones that know the comprehensive position of the US financial sector. Bernanke realizes that another bailout is not in the cards so soon after the last one, and another round of buying up toxic assets is not in the cards either. So he is not going to move until he is sure that the banks can stand on their own two feet. Otherwise, he risks a collapse, which would put him down as the worst Fed chair ever.

beowulf said...

Well if full employment has been redefined to mean NAIRU rate, then maximum employment should even be higher than that. In the last full year of World War II, 1944, unemployment rate was 1.2%. Anything short of that is sub-maximum.

Actually the law Bernanke should study up on is the Full Employment & Balanced Growth Act of 1978 (Humphrey-Hawkins). Congress set defined full employment and price stability at "not more than" 4% U3, 3% inflation. The Act makes clear, price stability is subordinate to full employment.
policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment..."
http://www.gpo.gov/fdsys/pkg/USCODE-2010-title15/html/USCODE-2010-title15-chap21-sec1022a.htm

Tom Hickey said...

The Act makes clear, price stability is subordinate to full employment.

Thanks for that citation, beowulf. Lock 'em up.

Matt Franko said...

Right Beo,

As a lawyer, how do you define the word "maximumm" in this context of the FRA wording here?

To me, it's like even Grannie could be working if she wants to???

Like "maximum" means "the most"??

Like there is no modifier on the word "maximum". ie its not "maximum theoretical" or something...

To me, "maximum" implies higher levels of employment than "full"...

Resp,

Anonymous said...

I just want to point out that there is an outstanding guest post on unemployment up today by Victor Quirk at billyblog:

http://bilbo.economicoutlook.net/blog/?p=18124&cpage=1#comment-22961

beowulf said...

In Humphrey-Hawkins, Congress directs the President to propose policies and timetables to achieve the US Govt's employment and price stability goals. If Congress sets "not more than" 4% U3 and 3% CPI as the President's targets, it would be perverse if they didn't intend the Federal Reserve to strive for the same goals.

The thing that astonishes me is that the CBO has the balls to use a 5.2% NAIRU as its own full employment target. As a consequence, the output gap is approx. $300B smaller than if Humphrey-Hawkins's 4% target were used.

Tom Hickey said...

The thing that astonishes me is that the CBO has the balls to use a 5.2% NAIRU as its own full employment target.

Sounds similar to using hedonics and substitution effects to jigger the inflation rate to save on COLA expenditure.