Monetary News from Jackson Hole

Grand Tetons at Jackson Hole, Wyoming     Photo Credit: Freeimage.com/Jack Sanders

A lot of vital news for the economy came out of two gatherings at Jackson Hole, Wyoming last weekend. The most avidly watched meeting was the annual Federal Reserve Bank of Kansas City’s policy conference. As the theme photo above shows, the Jackson Hole area has some captivating scenery, which seems to draw not just the Kansas City Federal Reserve Bank and all the other governors and presidents of the Federal Reserve, but also many of the world’s central bankers, academic experts, and financial market participants as well. The official theme of the conference was “Inflation Dynamics and Monetary Policy”.  Since the direction of the U.S. stock market has been mostly decoupled from the actual performance of the economy, and now moves upward with a hope of easy money or down with an expectation of tight money, a whole lot of money rides on how the Fed views “Inflation Dynamics and Monetary Policy”.   

According to the economic blog of the Manhattan Institute for Policy Research, an informal poll among the the Fed’s governors and presidents on whether the Fed should start raising interest rates in September was what riveted people’s attention. Not surprisingly, most said they would need further data on unemployment and inflation rates before they could definitely decide.

Not that data have been rapidly changing from month-to-month with time. They seem to be following the same dismal path of mediocrity. If you were to take a peak at this Bureau of Labor Statistics webpage, you would find the two charts shown below.

It appears as if the unemployment rate is reaching a minimum of around 5.3% with the monthly gains bouncing around 200,000. Meanwhile, the annualized monthly inflation rates vs. month is found on ycharts.com and is shown below. Notice that for most of 2015, the inflation rate has been below 0.2%. Perhaps the members of

the Federal Open Market Committee (FOMC) are waiting to see if inflation might be getting closer to their target inflation rate of 2%. I would be perfectly happy to see it remain around 0%, since then inflation would not impede money from performing its three major functions. See the discussion of the functions of money in the post The Federal Reserve and Monetarism, and the discussion of how inflation/deflation degrades the ability of money to fulfill these roles in the post The Ideal Monetary Policy. The Keynesians on the FOMC however think that in the short term, the Phillips Curve tradeoff between inflation and unemployment can still be used to reduce unemployment by encouraging inflation, and 2% is the inflation rate they think can do the job. Unless they are willing to let a lot more of the QE money to leak from excess reserves to the economy, they may have to wait a long time.

The lesser known second gathering held simultaneously at Jackson Hole was sponsored by a conservative non-profit organization called the American Principles Project (APP). Being conservatives, they were definitely discontented with Federal Reserve monetary policy over most of the past five decades or so. They are also unhappy with the way in which monetary policy no longer occupies the attention of the common man. There was a time when entire Presidential campaigns were centered on monetary policy in the late 19th and early 20th centuries. Remember William Jennings Bryan and his “cross of gold” from your U.S. history classes? With Keynesians taking up monetary policy as a way to stimulate the economy (and in the process change the value of the dollar), the APP members reason the time has come again to get excited about monetary policy.

Much as I reasoned in the post The Federal Reserve and Monetarism, the attendees at the APP gathering adopted the attitude that whatever monetary policy was selected, it should be the one that kept the purchasing power of the dollar, i.e. its value, as constant as possible. As alternatives, the conference discussed that perennial conservative favorite the Gold Standard, which has the disadvantage of being intrinsically deflationary, an inflation monetary rule (my favorite), and for some reason crypto-currencies like bitcoin. The APP conference took note that the Federal Reserve’s track record in preserving the dollar’s value is incredibly miserable. Allan Meltzer, a neoclassical professor of economics at Carnegie Mellon University, showed that from 1913 when the Federal Reserve was created to 2013, the country enjoyed both price stability and the absence of financial crises only about 25% of the time! This claim is supported by the Merck Investments chart, based on Bureau of Labor Statistics numbers, that is shown below.

When the unit of exchange, the store of value, and the medium of financial signals through which Adam Smith’s invisible hand works its wonders is perpetually damaged in this way, it is no wonder we have had so many economic hard times! If only we could persuade the Keynesians, and those who support them, of how much economic damage they do when they try to “stimulate” the economy at the expense of the value of the dollar, we could probably remove many years of future economic misery.

I do not know if the APP conference has had any effect on the state of the nation’s economic debates, but at least they assure me I am not the only one to be thinking these things. And they certainly pose a welcome contrast to the dismal thoughts of the Federal Reserve Jackson Hole conference.

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