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Has the Fed Officially Expanded Its Goals?

Posted by Larry Doyle on November 17, 2009 9:39 AM |

Navigating the economic landscape brings us down new and varied paths. In going down these paths, will we be able to double back and return to the main road of prudent fiscal and monetary disciplines in both the public and private sector? I am not so sure. I am also not so confident that our government officials and central bankers fully appreciate the implications of their policies and statements. I saw evidence of that just yesterday. Where? How so? Let’s navigate into the domain of the Federal Reserve.

What are the stated goals of the Federal Reserve? From the Fed’s website, we learn the following:

What are the goals of U.S. monetary policy?

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

What do maximum sustainable output and employment mean?
In the long run, the amount of goods and services the economy produces (output) and the number of jobs it generates (employment) both depend on factors other than monetary policy. These factors include technology and people’s preferences for saving, risk, and work effort. So, maximum sustainable output and employment mean the levels consistent with these factors in the long run.

So that’s why the other goal is “stable prices”?
Yes. Price “stability” is basically a low-inflation environment where people and firms can make financial decisions without worrying about where prices are headed. Moreover, this is all the Fed can achieve in the long run.

Fed-watchers monitor Fed actions to detect how disciplined our central bank is in pursuing these goals. There are always those who will critique the Fed for being too hawkish or dovish in its monetary policy in pursuit of these goals.

This morning, Fed-watchers should be very concerned. Why? Statements yesterday by Fed governors expanded well beyond the scope of stated Fed policy. While Fed chair Bernanke’s comments about the general weakness of the U.S. dollar are to be expected, readers should be aware that the relative strength or weakness of the dollar falls under the domain of U.S. Treasury, not the Fed. Bernanke’s comments on the Fed’s attentiveness to the dollar are not my major concern today. My major concern rests on comments by the Fed’s vice-chairman Donald Kohn. What did he say?

The Financial Times reports today, Bernanke Reassures Markets on Dollar. The final statement in this article stopped me in my tracks. Why? The FT writes in regard to Chairman Bernanke’s comments on asset prices:

“His message on asset prices was amplified by vice-chairman Don Kohn, who said one of the reasons the Fed was keeping rates near zero was “to induce investors to shift into riskier and longer-term assets”.

When did asset allocations and valuations become a stated goal of the Fed? Where does that fit into long term sustainable growth and stable prices?

While I am glad the vice-chairman let the cat out of the bag, if in fact asset allocations and valuations are now a stated goal of Fed policy, might we want to go back and speak to Congress about revising the official goals of the Federal Reserve?

No wonder so many are now ‘following the yellow brick road’ which symbolizes the gold market because with statements such as that put forth by the Fed Vice-Chairman Kohn, we are certainly not in Kansas anymore.

LD

  • Bill

    The Wizard of Oz was on the other night. I was reminded there is a school of thought that it is an allegory for the gold/silver dispute in the latter part of the 19th century. In the novel Dorothy wears silver slippers (these are changed to ruby in the movie) as she follows the Yellow Brick Road, signifying, of course, the rule of the gold standard.






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