The Oracle of the Fed

yellinWell, the Fed has spoken again, and it is as obscure as always. Yellin and her fellow Governors keep moving the boundary markers for taking monetary action. I think employment has them mystified. They initially set a target of 6%, which was the classic full employment level. As employment participation dwindled, they reset to 5.6-5.7%, then 5.5%, and it is now 5.0-5.2%.

We are evolving to an economy where many who would be expected to work simply don’t seek or need full-time employment. This shows up at young ages and in older ones too, for both of which there are adequate support cushions from family and government programs. Still by all prior standards we should have had demand pressure leading to wage growth and it isn’t happening. Meanwhile inflation stubbornly keeps threatening to drop from its current anemic level. That shouldn’t coincide with our exploding federal deficits, but it is. Something fundamental has changed and the Fed — plus everyone else — doesn’t understand it yet.

Regardless, GDP growth, inflation and employment are really not what is holding back the Fed. They are scared witless of the prospects, already in progress, for a strengthening dollar. That is a bit puzzling because a strong dollar is not necessarily bad news. In a strong economy it is actually a blessing. One must conclude that the Fed is suspicious that our economy is far more fragile than the data seem to imply.

But of course, the Oracle of the Fed always speaks obscurely, so who knows what they are really thinking?