Former Fed Chief Paul Volcker Chides Yellen et al.: Do we want prices to double every generation?

It’s interesting to see the revered former US Federal Reserve Paul Volcker assail at the policies adapted by his successors.

Having known for being an inflation fighter today Mr. Volcker questions on the wisdom of inflation targeting.

From the Wall Street Journal Real Times Economics Blog: (bold mine)

A 2% inflation target? Long-term, detailed forecasts of activity? Pledges to keep rates very low well into the future? For Mr. Volcker, who led the Fed from 1979 to 1987, these are all overly precise policy choices that promise more than any central bank can deliver. What’s worse, the policies that have come to define modern Fed policy can even be counterproductive, making central bank goals harder to achieve.

Mr. Volcker, 87, weighed in on monetary policy while participating at a conference held at the Federal Reserve Bank of Philadelphia on Thursday. The former central banker occupies a hallowed place in the institution’s history, having helmed the effort that decisively killed the high inflation that boiled out of the 1970s, albeit by way of creating a sharp economic downturn. His blunt-force approach to central bank policy making stands in sharp relief to the increasingly complex web of communications and tools that have come to define the Ben Bernanke and Janet Yellen eras of central bank leadership.

Mr. Volcker, who believes the Fed’s main goal is to defend the dollar’s stability, said he doesn’t even understand why the Fed adopted a 2% target for inflation. He asked, “Do we want prices to double every generation?”

Mr. Volcker said that “any price index is an approximation of reality,” and it would be better if the Fed was “fuzzy” about what level of prices it wished to achieve. What’s more important, he said, is that “you want a situation where people generally expect prices will be stable,” and the Fed appears to have that right now.

Apparently the article's author attempts to contradict Mr. Volcker by interjecting “Fed appears to have that right now” in allusion to stable prices. 

The problem with author’s perspective, being a seeming apologist of the modern day FED, has been to cheerlead on the tunnel vision of statistically derived consumer prices. Such statistics has been assumed to reflect on objective reality even when the components reveal different degree of inflation (yes inflation’s impact to individuals are subjective as the basket of everyone’s consumption are like thumbprints, they are distinct), when statistical smoke and mirrors have been used to determine price levels, when statistics downplay prices in the real economy (e.g. food and rental) to instead rely on surveys (e.g. owner’s equivalent rent), when  purchasing power of the US dollar has been undergoing a slomo boiling of the proverbial frog (even the US government's Bureau of Labor Statistics inflation calculator exhibits this), and most importantly, the exclusion of financial assets in the evaluation or assessment of price stability.  For the consensus, consumer prices have no apparent link to financial assets.

 

Mr. Volcker likewise rebuked the FED for shaping their policies based on inaccurate forecasts:

Mr. Volcker also said the Fed’s decision to provide long-term forecasts for key economic variables is simply folly.

“The fate of the Federal Reserve can’t depend on the accuracy of the forecasts it makes two years ahead,” he said. Offering up forecasts with greater frequency and details–the Fed now does this on a quarterly basis–simply demonstrates to the public “more frequently the forecasts aren’t that accurate.” 

Fed guidance that has at points pointed to calendar-date expectations of rate increases, as well as official guidance that rates will stay very low for a long time to come, are ultimately unproductive, he said. “If you make it precise in terms of interest rates, then the market begins working against you,” and any disconnect between what the Fed promised and what it’s delivering can cause market trouble, he said.

Mr Volcker’s point: Policies based on wrong analysis and forecasts equals unintended consequences 

The Fed’s communications ambiguity came also under Mr. Volcker’s scrutiny:

Mr. Volcker also said that officials, other than the Fed leader, are talking too much these days and making it harder for the central bank leader to deliver a coherent message about the policy outlook

In sum, Mr. Volcker’s tirade can be seen in the context of the great Austrian economist F.A. Hayek’s censure of central planners: The Fatal Conceit

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.