Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

“It’s the Inflation, Stupid”

by Benn Steil and Dinah Walker
December 16, 2013

dual mandate

“Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased,” said Federal Reserve Bank of St. Louis President James Bullard on December 9.  Indeed, Fed watchers have been firmly focused on the improving labor market data in their handicapping of the prospects for an imminent Fed “taper” of its monthly asset purchases, known as “QE3,” which it began back in September 2012.

Yet the Fed has a dual mandate, the second aspect of which, inflation, has been galloping away from the Fed’s target.  Indeed, the Federal Open Market Committee (FOMC) justified the launch of QE3 by referring specifically to the need to “ensure that inflation, over time, is at the rate most consistent with its dual mandate.” And “inflation,” Bullard noted, “continues to surprise to the downside.”

As the FOMC begins two days of meetings, we benchmark the Fed’s performance against each element of its mandate as well as a combination of the two.  As today’s Geo-Graphic shows, the Fed’s preferred inflation measure has been moving away from the Fed’s 2% target faster than unemployment has been declining towards the 5.6% midpoint of the Fed’s range of longer-run estimates.  Since QE3 began, inflation has declined from 1.7% to 0.7% (at its last reading in October) as unemployment has fallen from 7.8% to 7%.  As our small inlaid graphic shows, if the Fed were placing equal emphasis on inflation and unemployment there would be no grounds for beginning to taper its monthly asset purchases at this time—the Fed is today farther away from its dual-mandate benchmark than it was when it launched QE3 last year.

Wall Street Journal: Fed Faces Tough Decision on Bond-Buying
Financial Times: Strong U.S. Jobs Data Raise Expectations of Fed Taper
Economist: Is QE Deflationary?

 

Follow Benn on Twitter: @BennSteil
Follow Geo-Graphics on Twitter: @CFR_GeoGraphics

Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Post a Comment No Comments

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required

Pingbacks