The Fed Ups: New Inflationists in town arguing for a higher inflation target…

Prof Larry White has a scathing piece on continued attempts by economists to push central banks into influencing real economy. Recently, several top US econs signed an open letter asking Fed to raise inflation target.

Prof White says these are the new Fed ups in town:

“Fed Up” is the name of a progressive initiative that describes itself as a coalition of “community-based organizations, labor unions, policy experts, and faith leaders…united in our call for a strong economy that works for everybody and a more transparent and democratic Federal Reserve.” Its main organizer is the Center for Popular Democracy, with support from the AFL-CIO, and the Economic Policy Institute, among others.

Fed Up has two main causes. First, it raises an important issue when it questions the current governance structure of the regional Federal Reserve Banks. Ironically, while it calls for greater diversity of backgrounds among FRB directors, Fed Up never seems to notice that FRB presidents are today the main source of diversity of thinking on the Federal Open Market Committee. Between 1995 and 2013, Dan Thornton and David Wheelock have found, “there were just two dissents by governors compared with 67 by presidents.” Since 2006 there have been zero dissents by members of the Board of Governors.

Fed Up secondly offers advice to the Federal Open Market Committee, the monetary policy body whose voting members consist of the Board of Governors plus a rotating subset of Reserve Bank presidents. It urges the FOMC to pursue a secularly more expansionary monetary policy, in the erroneous hope that this would bring greater prosperity to workers. In its wishful view “The Fed should target real wage growth that is higher than economy-wide productivity growth, in order to combat inequality and boost workers’ share of income.”

To say that “the Fed should” do x is to imply that the Fed can do x. Regrettably, however, the Fed has no policy tool with which to target real wage growth. Nor does any agency have a tool to raise real wage growth above productivity growth. The Fed can print money faster, which generates higher inflation, but this does not sustainably increase real wages or employment. The Fed cannot improve the productivity or demand for labor by generating 4% or 5% rather than 2% inflation in the long run. (Raising inflation even further to double digits would clearly harm workers by deranging economic coordination).

Nor does faster money growth sustainably lower the real interest rate. It is an elementary proposition of monetary theory that the real interest rate is independent of monetary policy in the long run. Faster money growth only raises inflation and thereby the nominal interest rate, which is determined by the real interest rate plus the expected inflation rate. For the Fed to secure lower nominal interest rates in the long run it must lower the inflation rate, and so must pursue a lessexpansionary monetary policy.

In June, Fed Up organized and published a letter calling on the Fed to commit explicitly to higher inflation by raising its official inflation target above the current 2% rate. Twenty-two professional economists signed the letter, including Nobel laureate Joseph Stiglitz; former Minneapolis Fed President Narayana Kocherlakota; and several former Obama administration economists. Prominent academic signers included Justin Wolfers, Laurence Ball, and Brad DeLong. The letter can be read in its entirety here.

It is obviously that Prof White is “Fed Up” of these continuous attempts..

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