Outside the Box Hoisington Quarterly Review and Outlook, Second Quarter 2017

I have often written about the Fed’s abysmal track record in managing the economy. In today’s Outside the Box, Lacy Hunt and Van Hoisington of Hoisington Investment Management give us an in-depth tutorial on the reasons for the Fed’s consistently poor record.
They start by considering the Fed’s ‘dual mandate,’ which sets ‘the goals of maximum employment, stable prices and moderate long-term interest rates.’ (And yes, that is actually three goals, not two.) But a problem arises, the authors note, ‘because considerable time elapses between the implementation of the monetary actions designed to follow the mandate and when the impact of those actions take effect on broader business conditions.’ The time lag can easily be three years or longer, with the result that policy changes often end up being pro- rather than countercyclical. To make matters even worse, ‘the economic risks from adherence to this dual mandate are now much greater than historically due to the economy’s extreme over-indebtedness, poor demographics and a fragile global economy.’
In the real world, the dual mandate can break down. Now, the Fed is tightening over concerns about wage pressure from a low level of unemployment, yet inflation has run consistently below the Fed’s 2% target for the past year or more. Enter the Phillips curve.

This post was published at Mauldin Economics on JULY 26, 2017.