Well this seems unusual—a Fed economist demonstrated tenacity to challenge the position of his bosses and of the establishment.
From the Wall Street Journal blog, (bold emphasis mine)
New research from the Federal Reserve Bank of St. Louis warns there is more than enough kindling to start an inflation inferno.
The paper, written by staff economist Daniel Thornton, stands in opposition to the views of key central bank officials like Chairman Ben Bernanke and others, who argue that even as the Fed has pumped liquidity into the financial system, it has the tools it needs to control the inflationary potential of those actions.
In his paper, Thorton bases his warnings on the interaction between Fed liquidity actions and growth in the money supply. He acknowledges that in focusing on what happens with money supply, he is standing apart from the current view of many economists. Also, Thorton isn’t asserting the inflation environment has turned sour, only that central bank policy has created conditions for trouble, and that problems could develop quickly.
“Both economic theory and historical experience suggest that a significant and persistent expansion in the money supply will be associated with a significant increase in the longer-run inflation rate,” Thornton writes.
He indicates current rates of inflation could suffer should money supply start to expand quickly: “The recent acceleration in the growth of the money supply is of particular concern because the year-over-year consumer price index inflation for December 2011 is 3.0% and the year-over-year personal consumption expenditures inflation for November is 2.5%, both of which are already above the [Federal Open Market Committee's] implicit inflation target of 2%.”
Thorton’s worry is rooted in the massive and ongoing liquidity the Fed has provided the economy since 2008. Much of that money actually hasn’t made it out into the economy, with banks parking the funds back at the Fed in the form of excess reserves.
The study seems to take the central banking dogma of inflationism to task (I have not read it but am basing from the above account).
It’s a wonder if Mr. Thornton has been closet Austrian or if the mainstream has now been “infiltrated” by the Austrian School analysis.
Moreover, it would be doubtful if his warnings will ever be heeded. My guess is that Mr. Thornton may have signed away his resignation letter through this study.
Nevertheless, broaching echoes of truth from a potential reformer from the US Federal Reserve is a refreshing development.
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