The Federal Reserve Bank of Kansas City is a relatively solid, well-run institution and its President Esther George is among the most sensible members of the Federal Open Market Committee when she is permitted to attend it (her next triennial year of service is 2019). It is thus surprising and regrettable that its annual Jackson Hole conference has become a factory for bad ideas second only to the annual Davos Gabfest. This year it surpassed all barminess records, with the usual monetary madness of recent years joined by regulatory madness and fiscal madness. Surely the Kansas City Fed can find better things to do than sponsor this nonsense!
To be fair, on monetary policy Jackson Hole was no barmier than it has been for the past decade. The Fed has moved about three inches in the direction of sensible interest rates and has announced its intention of beginning ever so slowly to wind down the excessive market-distorting portfolio of mortgage bonds and Treasuries it took on in the past decade. Indeed, Fed Chairman Janet Yellen avoided monetary policy altogether in her presentation, probably a wise move. However, European Central Bank President Mario Draghi justified the ECB’s much worse current policy, which he had introduced at Jackson Hole three years ago, with massive market-distorting bond buying and zero interest rates.
In particular, Draghi continued to justify the 2% inflation target which he, Japan’s Haruhiko Kuroda and Yellen have in common (it is an explicit target of the ECB and the Bank of Japan, but not of the Fed.) This rises to new heights of barminess. 2% inflation halves the value of your money every 35 years; it means that anyone who retires today is liable to end up destitute in his or her 90s.
2% is just about acceptable as a maximum level of inflation, above which Volckerite 12% interest rates will be used to drag it back in control. However, 2% inflation makes no sense whatever as a target to aim at, still less as a justification for excessively expansionary monetary policies, with negative real interest rates, simply because inflation is at say 1.3%. Even if Japanese-style deflation were proved to be economically damaging (and there has been no such proof; Japan’s productivity performance since 1990 has been among the best of the advanced economies) 1.3% inflation is not deflation and should not be treated as such.
