We had an interesting moment yesterday. The Federal Reserve announced they were officially tying their rate decision to the Unemployment rate and Inflation. Their dual mandate for these 2 metrics has always caused them to discuss, vote and act- THEN announce their intentions. This is the first time in History they are tying it to any specific metric.
For Inflation- it needs to stay under 2.5%
For Unemployment- it needs to stay over 6.5%
If both of those stay true, then the Fed monetary policy will not change.
If either of those metrics hit their target, then the Markets would be aware and could react PRIOR to the Feds next meeting, decision, or announcement.
Sounds simple- right? WRONG and in spades.
They made this announcement and are about to spend $1.02 TRILLION dollars in ONE YEAR...
...AND THE MARKETS DIDN'T REACT AT ALL!
THAT should really concern folks- for as the Feds impetus loses effect, it is money wasted as opposed to money well spent. One person was quoted as saying this lack of reaction was due to other Central Banks also acting, so the US Fed decision was more "Keep up with the Jones" and less actually to stimulate.
Also, you should think back to the unemployment rate change in November. It dropped .2%, right? The reason wasn't that we created a ton of jobs (only 146K), but mainly that over 350K people had left the work force. So now this mandates paradigm has shifted into looking at a rate which is improving for the wrong reason. In theory, we could keep losing people from workforce and not create jobs- therefore hitting the Feds target of 6.5% in a mere 6 months... then what? People aren't working, and more people will be drawing out entitlement money- see the problem?
My point is simple- The Fed has 2 mandates, but their monetary policy in a "new normal" of a perpetually higher unemployment rate of say 6.5% would spike inflation. But the contrary view is a lower unemployment rate BUT for the the wrong reason (less in workforce, as opposed to more jobs created). The Rate is great at capitalizing banks but horrible at return to holders of bonds, CDs, etc and not impressive at incentivizing banks to make loans. The Targets of 6.5% and 2.5% are understandable, but I fault the Fed for not defining the path that needs to be followed in getting those targets.
What if their policy creates the very inflation they are mandated to deal with?
What if their focus is a Unemployment rate which is low FOR THE WRONG REASON?
Their focus needs to be on Monetary policy. A focus on JOB CREATION for lower unemployment. A focus on low inflation which allows for more efficient spending, as opposed to higher inflation do to the pressure of the policies meant to combat it.
That the Fed has acted singlehandedly (Congressional and Presidential gridlock of Fiscal Policy) is to be admired. They had done a solid job so far.
This last decision comes with an irregular response, a potential horrific outcome, and a focus on a target which is improving for ALL the wrong reasons.
Job Creation needs to be the ONLY focus, and so far- I am uninspired by everyone in Washington DC.