Monetary officials continue to maintain that inflation will eventually meet their 2% target on a sustained basis. They have no other choice, really, because in a monetary regime of rational expectations for it not to happen would require a radical overhaul of several core theories. Outside of just the two months earlier this year, the PCE Deflator has missed in 62 of the past 64 months. The FOMC is simply running out of time and excuses.
That is very likely why earlier this week Federal Reserve Chairman Janet Yellen admitted that economists like her and her fellow policymakers might not really understand inflation. The larger, more important implication is that if they don’t comprehend inflation they can’t really comprehend money, either. It has taken seventeen years, but we are finally getting closer to reconciling with what Alan Greenspan was talking about in June 2000:
CHAIRMAN GREENSPAN. The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition. [emphasis added]
This post was published at Wall Street Examiner by Jeffrey P. Snider ‘ September 29, 2017.
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