{"id":13891,"date":"2015-10-28T06:44:39","date_gmt":"2015-10-28T11:44:39","guid":{"rendered":"http:\/\/olduvai.ca\/?p=13891"},"modified":"2015-10-28T06:44:39","modified_gmt":"2015-10-28T11:44:39","slug":"the-wrong-war-for-central-banking","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=13891","title":{"rendered":"The Wrong War For Central Banking"},"content":{"rendered":"

The Wrong War For Central Banking<\/a><\/h3>\n

Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed.<\/p>\n

The US Federal Reserve exemplifies this policy dilemma. After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.<\/p>\n

For the inflation-targeting purists, the argument seems impeccable. The headline consumer-price index (CPI) is near zero, and \u201ccore\u201d or underlying inflation \u2013 the Fed\u2019s favorite indicator \u2013 remains significantly below the seemingly\u00a0sacrosanct 2% target<\/a>. With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.<\/p>\n

Of course, there is more to it than that. Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions. In the Fed\u2019s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.<\/p>\n

Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the \u201cspecial factors\u201d driving the often volatile prices of goods like food and energy. The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.<\/p>\n

This approach failed spectacularly when it was adopted in the 1970s, causing the Fed to\u00a0underestimate\u00a0<\/i>virulent inflation. And it is failing today, leading the Fed consistently to\u00a0overestimate<\/i>\u00a0underlying inflation. Indeed, with oil prices having plunged by 50% over the past year, the Fed stubbornly maintains that faster price growth \u2013 and the precious inflation rate of 2% \u2013 is just around the corner.
\n…click on the above link to read the rest of the article…<\/p>\n","protected":false},"excerpt":{"rendered":"

The Wrong War For Central Banking Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed. The […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[124,426,10305,431,534,8402,7578,1939],"class_list":["post-13891","post","type-post","status-publish","format-standard","hentry","category-economics","tag-central-banks","tag-inflation","tag-inflation-targeting","tag-interest-rates","tag-monetary-policy","tag-project-syndicate","tag-stephen-roach","tag-zirp"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13891","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13891"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13891\/revisions"}],"predecessor-version":[{"id":13892,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13891\/revisions\/13892"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13891"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13891"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13891"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}