Monday, April 23, 2007

With the Fed Speaking More Plainly These Days, Why Is Mishkin Still Talking Greenspan?

Former Fed Chairman Greenspan was well known for his purposeful lack of clarity when speaking to the public. In fact, he once quipped, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said." []

But the public eventually tired of the game of Blindman's Bluff, and the Fed, realizing it was losing credibility, has begun to clear up its language somewhat since Greenspan's retirement.

Blindman's Bluff
[Thanks to for this Nast cartoon, which I have tweaked. Click on it for a larger version.]

From time time, however, we get notable exceptions like this one found in a speech by Governor Frederic S. Mishkin on April 20, 2007. (I have already complained about this fellow before.)

Here's the quote:

"Given my estimate of the current level of long-run inflation expectations as well as the likelihood of some easing of resource pressures in labor and product markets, I expect that core inflation will slow to around 2 percent over the next couple of years. Although I believe that inflation expectations will play a primary role in determining the course of inflation, I want to emphasize that neither economists nor policymakers understand the expectations-formation process very well. However, one aspect of expectations formation that we have come to regard as crucial is the credibility of monetary policy. Consistent with its dual mandate to foster maximum sustainable employment and price stability, the Fed must therefore continue to respond aggressively to shocks that have potentially persistent adverse effects on both inflation and real activity. And we need to monitor long-run inflation expectations closely to avoid losing credibility with the markets."

At first passage, one thinks, "The sentences seem clear, he must be making sense." But after a few seconds comes the next thought, "Wait a minute. What did he actually say?"

Well, let's take another look:

"I believe that core inflation will slow to 2 percent in the near future. I also think that people's inflation expectations actually are a principal cause of inflation. No one really understands how people reach these expectations, but one thing we assume is that what the Fed does and says has a lot to do with it. Therefore, the Fed must constantly study incoming data and fiddle with the money supply at the first sign of economic disruption. That way, everyone will think we have a handle on the situation."

Or more concisely:

"At this point, only the public's misapprehensions could create more inflation; and so, because people actually take us seriously here at the Fed, all we have to do to prevent any more inflation is to continue to act as though we know what we're doing."

Oh, stop the charade, Governor. -- It is a charade, isn't it?

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