Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Fed's Dual Mandate is Mission Impossible


Control of money supply and short-term interest rates won't be enough.


While market participants are giddy with thoughts of a V-Shaped Recovery and Bernanke is taking victory laps celebrating the Orwellian madness "We Saved The World," other members of the Fed are a bit more realistic.

For example, the Fed's Lockhart sees protracted high unemployment:

"My forecast envisions a return to positive but subdued gross domestic product growth over the medium term weighed down by significant adjustments to our economy," Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks.

"My forecast for a slow recovery implies a protracted period of high unemployment," said Lockhart, a voting member of the Fed's policy-setting committee this year.

"The challenge my colleagues and I face is navigating between the risk that early removal of monetary stimulus snuffs out the recovery and the risk that protracted monetary accommodation stokes inflation expectations that could ultimately fuel unwelcome inflationary pressures," he said.

"The Fed must deal with this tension, particularly in coming quarters, as we pursue our dual mandate of price stability and maximum employment," Lockhart added.

Dual Mandate Equals Mission Impossible

Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is that the Fed controls neither.

Sure, the Fed can increase money supply but all those who thought it would necessarily cause prices to rise sure got it wrong.

The CPI is now a negative 2.1% year-over-year and my preferred measure, called Case-Shiller CPI, is running at negative 6.2% year-over-year. Please see What's the Real CPI? for details.

The simple truth of the matter is the Fed can print money, but it cannot control where it goes, or even if it goes anywhere at all. Indeed the Fed can encourage but not force banks to lend, and encourage but not force consumers to borrow.

The result of all the recent Fed printing is a big yawn, otherwise known as excessive reserves as the following chart shows.

Excess Reserves of Depository Institutions

Does that chart look like the Fed is in control? If so, control of what?

Bear in mind that those excess reserves are a mirage. They do not really exist. Pending writeoffs in foreclosures, bankruptcies, credit cards, and especially commercial real estate will eat up those reserves and then some.

Although the Fed's "Dual Mandate" is complete nonsense, I do agree with Lockhart on one key point: The US economy will suffer with Structurally High Unemployment For A Decade.

< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos