This is the danger lurking in the Fed's monetary policy, says Jim Grant:
Last Monday, the Federal Reserve embarked on a yearlong listening tour to discover the concerns of the American people. The whole shebang of modern monetary methods—manipulated interest rates, levitated asset values, the supposed necessity of a 2% inflation rate—is on the table for constructive criticism.
It might, indeed, except for 10 years’ familiarity with once-heretical ideas. “Quantitative easing” seemed wild-eyed enough at the time it was hatched in 2008. Who objects now? Just who has made bold to forecast the course of this conceptual rate of interest , Clarida didn’t say. But he did warn of the consequences of its collision with the so-called zero bound.
William McChesney Martin, the longest-serving Fed chairman, said in August 1955, “We can never recapture the purchasing power of the dollar that has been lost.” Martin, who, in the Great Depression, witnessed an actual, virulent deflation, was nonetheless adamant that defending the integrity of the currency was job No. 1.
Yet the term “persistent inflation shortfalls” from that 2% target exactly describes the postcrisis record of Fed policy making. Still not doubting their ability to control events, the mandarins keep searching for a bigger bag of tricks.