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A shocker that few noticed [ClearOnMoney]
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A shocker that few noticed

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Commentary

A shocker that few noticed

22 Sep 2010 by Jim Fickett.

Yesterday's statement by the Federal Reserve's Open Market Committee, that inflation is too low and they are willing to push it higher, is a watershed. The FOMC has not made such a statement before, and the fact that most reporters noticed nothing unusual does not lessen the fact that this is a game changer.

When I read the Federal Open Market Committee statement released yesterday, in which it was said that inflation was too low and the Federal Reserve may work to raise it, I was shocked. Here it is again:

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. The Committee…..is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

And then I was even more surprised that no one else seemed to be shocked. Yes, I know Bernanke has already made it clear that he wants to fight deflation. But how often does a central banker state unequivocally that inflation should be higher, and he is willing to work to make it so?

Yet most news sources passed right over this. Briefing.com was typical:

The bulk of the FOMC statement did not say anything new, or anything the market did not expect it to say, yet that did not stop the capital markets from reacting to it.

Yawn … nothing special here, folks.

I thought perhaps I was missing something, that FOMC statements in the past had been down this path before, and somehow I had just missed it. But no, this really does set a precedent, and most people have simply gotten so used to the Fed being in uncharted waters that they didn't notice. Gavyn Davies, head of the global economics department at Goldman Sachs from 1987-2001, chairman of the BBC from 2001-2004, and now (among other things) blogger at the Financial Times, writes

The Fed breaks a taboo on inflation

The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle. Led by the Fed’s Paul Volcker, they re-asserted the importance of monetary policy, after two decades of failed wage and price controls. Since that period, most central bankers have been careful to avoid any language which even hints that a rise in inflation is acceptable to them. I can certainly find no previous record of the FOMC saying that inflation is too low, so it was a jolt to see this stated so starkly in the Fed statement yesterday.

And Davies concludes,

it is not difficult to see why the dollar has been falling, and gold rising, in the markets today

Indeed. That was a watershed. And one I hope we don't come to greatly regret.