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The FOMC: Bernanke's Lap Dogs or Full-Time Deceivers?

Gary North - June 25, 2013
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The head of the Federal Reserve Bank of St. Louis has been cautiously critical of Bernanke's remarks on June 19 regarding the possible early exit by the Federal Open Market Committee from QE3 later this year. Bernanke's remarks sent world stock and bond prices lower.

A press release explains his concerns.

In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

Bullard has to know this is utter poppycock. The Committee does not "strongly signal" anything, ever. It always hides behind bland bureaucratic verbiage -- and not just bureaucratic verbiage: boilerplate bureaucratic verbiage. The FOMC's language has been identical all year. I have cited these statements word-for-word here.

The FOMC has repeated the price inflation figure of 2% all year. It never adds any explanations. It never holds press conferences. It simply hides behind boilerplate. Here is what it always says:: ". . . this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

Bernanke's public statement raised the acceptable unemployment figure to 7%. In a 28-page statement -- he said this:

Although the Committee left the pace of purchases unchanged at today's meeting, it has stated that it may vary the pace of purchases as economic conditions evolve. Any such change would reflect the incoming data and their implications for the outlook, as well as the cumulative progress made toward the Committee's objectives since the program began in September. Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program (pp. 4-5).

On his own authority, he simply scrapped the FOMC's official statements. But Bullard held back. He did not say what Bernanke very clearly did. No Federal Reserve regional bank president has had the guts to say this. Bullard pretended that the FOMC was secretly behind Bernanke's statement. He pretended that the FOMC had authorized this unilateral revision of its official boilerplate.

Then he went on to criticize Bernanke as a big mouth.

Bernanke does not speak for the FOMC, said James Bullard. In a statement published on the website of the St. Louis FED, Bullard was hostile to the FOMC in giving Bernanke too much authority to announce policy.

Who does Bullard think he is kidding? The FOMC granted Bernanke no such authority. Bernanke simply pulled the rug out from under the other members in full public view.

The financial world took Bernanke at his word -- that he was in charge, not the FOMC. He gave every indication that the FOMC is an appendage -- a convenient chorus for the Chairman. He was saying, loud and clear, that the FOMC, like pop music's back-up singers, are 20 feet from stardom.

The FOMC once again went public with its boilerplate 6.5% unemployment figure on June 19. On the same day, Bernanke upped it to 7%. In short, "pay no attention the FOMC." The financial world didn't. This bothers Bullard.

President Bullard also felt that the Committee's decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee's decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

If the FOMC authorized this, then its members are lying through their collective teeth every time they issue the boilerplate policy. They tell the rubes in the financial world one thing, but they are planning a different policy altogether.

Which is it, folks? Did Bernanke simply dismiss you as a bunch of peripheral backdrops to his personal monetary policy, or are you hiding behind your boilerplate verbiage to conceal your real intentions?

In either case, you need to put Bernanke on a tight leash. He is making you look like his personal lap dogs.

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