In Which I Confess, Once Again, That I Do Not Understand the Argument for the Taper as Long as Inflation is Below Its Target…: Monday Focus

…its taper of the programme popularly known as QE3…. The Fed’s move looks shortsighted and dangerous…. There is little sign that labour markets are running out of slack. There are lots of downside risks abroad. The Fed should be trying to overshoot its target in order to build up more of a cushion against low inflation and interest rates, and so on. But… let’s stick with the most basic argument of all…. The Fed’s mandates… maximum employment and stable prices…. The best way to deliver on those mandates, it reckons, is by targeting a rate of inflation of 2%, as measured by the price index for personal consumption expenditures. This is monetary orthodoxy of the highest order, delivered directly from the Fed. It could not be clearer. Here is what has happened to the price index for personal consumption expenditures since that time:

Market-based measures of inflation expectations are not perfect, but… they have indicated that inflation is likely to be below target on average over the next five years. It would be shocking if that were not the case, given that the most recent Fed projections also indicate that inflation will be below target for the foreseeable future. We can debate whether the Fed has the right target…. Do you know what’s not up for debate?… Setting a public target, consistently missing that target, projecting that the target will be consistently missed in future, and conducting policy so as to make sure the target is in fact missed: that is lousy monetary policy making. And I cannot understand why the Fed does not see this record as detrimental to the recovery and highly corrosive of the Fed’s credibility….

I understand why so many people are uncomfortable with QE. It would be much more satisfying if the Fed could stimulate the economy by printing money to give to orphanages; sadly it is not allowed to do so. But… we should not let distaste with the means to drift into tolerance for a failure to achieve the Fed’s self-adopted ends. So, QE critics, what should the Fed do?