FX MONETARY POLICIES
Janet Yellen explicitly said recently that the Fed does not understand the fundamental forces driving inf lation. With price stability being one of the Fed’s mandated goals, we would have thought that the Fed would need to have a pretty clear understanding of fundamental forces that drive inf lation.
In
fact, we seem to hear an awful lot these days from the Fed (and all developed country central banks for that matter) about how they must get
inf lation
back up to their 2% target; a target they set themselves in January 2012. It’s as if inf lation is THE most d e s i r a b l e e c o n o m i c outcome, over and above say productivity growth, wage growth and financial stability to name a few.
How can the Fed have the right monetary policy when they are targeting a self- imposed target on an economic dynamic that they do not understand?
How can they possibly have the right monetary policy setting when they are targeting a self-imposed
38 FX TRADER MAGAZINE October - December 2017
policy has been a huge experiment conducted by central banks without any proof that it would help the real economy, nor a true understanding of what the negative consequences would be. We think it’s correct to say that financial markets
target on an economic dynamic that they do not understand? Of course, the answer is that they cannot possibly have the correct monetary policy setting. Post GFC monetary
have benefitted from this grand experiment significantly more than the real economy, and that the unintended consequences are only likely to be seen once monetary policy has been normalised.
We should note that we certainly have no better understanding of
the
fu nd ame nt al forces driving inf lation than the Fed does, but we do want to take issue with the almost maniacal desire on the part of central banks to keep inf lation moving
ever upwards.
Chart 1 shows global
inflation
from an historic perspective and also over the last 100 or so years. Many
of you
will know that the Fed was created in 1913, which strangely coincides with the time when inflation became a permanent feature of developed countries. Furthermore, although we would have to expect periods of war to coincide with higher inflation, the
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