Jim Grant: The Danger Lurking In The Fed’s Monetary Policy

Saturday, March 2, 2019
By Paul Martin

by James Grant, op-ed via MarketWatch.com,
Sat, 03/02/2019

Last Monday, the Federal Reserve embarked on a yearlong listening tour to discover the concerns of the American people. The whole shebang of modern monetary methods – manipulated interest rates, levitated asset values, the supposed necessity of a 2% inflation rate – is on the table for constructive criticism.

But you know how it is with constructive criticism. The friend who asks to hear it really doesn’t want any. So it is with Richard H. Clarida, the Columbia University economist turned vice chairman of the Federal Reserve Board.

In a Feb. 22 speech, Clarida invited the public’s comments as the central bank undertakes a top-to-bottom reappraisal of the way it does business. Then he said this: “The fact that the system is conducting this review does not suggest that we are dissatisfied with the existing policy framework.” A comprehensive description of that framework duly followed. So admirably clear was his message that it might have curled your hair.

It might, indeed, except for 10 years’ familiarity with once-heretical ideas. “Quantitative easing” seemed wild-eyed enough at the time it was hatched in 2008. Who objects now?

Clarida acknowledged no doubts. He said that radical monetary policy has worked, that it will continue to work, and that it may well become more radical. He contended that low interest rates are here to stay and that new policy “tools” must be sharpened and kept at the ready. As to potential adverse consequences of administered rates and the mind-control games meant to “anchor” our collective expectations of the future, he mentioned none.

The Mike Pence of the Fed, Clarida was pushing no novel agenda of his own. His interest-rate worldview is the institutional one. It springs from the contention that the natural level of rates since the financial crisis has naturally and irresistibly fallen.

Certainly, rates are astoundingly low – Bank of America Merrill Lynch recently was able to count $11 trillion of bonds worldwide quoted at yields of less than zero. Clarida said that the decline in the so-called neutral rate of interest “is widely expected to persist for years.”

Just who has made bold to forecast the course of this conceptual rate of interest (you can’t see it and you can’t trade it), Clarida didn’t say. But he did warn of the consequences of its collision with the so-called zero bound.

At zero percent, he said, the Fed would be hard-pressed to ensure that the inflation rate stays put in the neighborhood of 2%. That you can’t have no inflation, the vice chairman takes as a revealed truth.

Creditors, and any who lived through the Great Inflation of the late 1960s through the early 1980s, might disagree. They might prefer an inflation rate of nil.

William McChesney Martin, the longest-serving Fed chairman, said in August 1955, “We can never recapture the purchasing power of the dollar that has been lost.” Martin, who, in the Great Depression, witnessed an actual, virulent deflation, was nonetheless adamant that defending the integrity of the currency was job No. 1.

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