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.

The Problem with Janet Yellen's Recovery Outlook


For starters, she supports inflation targeting.


Yellen Supports Inflation Targeting

My biggest grievance with Janet Yellen (aside from my distaste of the Fed's existence at all) is her support of inflation targeting. Since when is a 2% annual rise in prices stable? Here's a chart that shows what I mean.

Inflation Targeting at 2% a Year

Click to enlarge

Eventually, on a scheme like this, wages are bound to not keep up with prices. Moreover, the Fed ignores asset bubbles in its calculation of "inflation."

Finally, it's important to note that the Fed can't control prices in the first place. The last four years should be proof enough.

I don't believe Yellen when she says: "I can assure you that we will be ready, willing, and able to tighten policy when it's necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment."

I don't feel she has a firm enough grasp on price stability, and even if she did, the Fed has proven it won't act on asset bubbles. Yet Belief In Wizards Runs Deep.

Inflation Targeting and Price Stability Questions

  • Why should inflation be targeted at 2% and not 1% or 3%?

  • Why should any inflation be targeted at all?

  • Even if it's smart to target prices, can prices really be measured it accurately?

  • What do central banks do to overcome lag effects of monetary tightening and loosening?

  • Is this just blind faith -- "we know neutral when we see it"?

For more on Fed-promoted price stability, please see the Fallacy of Inflation Targeting.

That the Fed ignored asset prices in its measure of "inflation" is one of the reasons we're in this mess.

Correct Inflation Target Is Zero

Here's the deal: The correct inflation target is zero. And we'll never get there with a Fed that thinks micromanaging interest rates is the way to achieve stability.

Inquiring minds are reading Does Inflation Targeting Make Any Sense?

"Volcker: 'I don't get it…' By setting 2% as an inflation objective, the Fed is 'telling people in a generation they're going to be losing half their purchasing power.'"

"Inflation Targeting Is A Moral Hazard

"Given that inflation benefits those with first access to money, any targeted inflation at all is morally wrong. Finally, for all this silly talk about inflation fighting and inflation targeting, it's important to remember what inflation really is. Inflation is an expansion of money supply and credit, where credit is marked to market. Prices generally follow money supply but there is a variable time lag, productivity and consumer sentiment are huge factors, as are a host a host of global factors including interest rate differentials and currency fluctuations.

"So even if the Fed could achieve that magic 2%, the whole shebang would eventually blow sky high anyway (as it just did) because wages will not keep up with prices causing asset bubbles to pop."

I think Yellen is a likable person who, as I said, doesn't sugarcoat everything and seems to speak from the heart. But when it comes to "inflation targeting" I agree with her no more than I do Bernanke.

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