I disagree with him on several basic assumptions:
1. "Underlying inflation has fallen close to 1%":
If you measure inflation based on what people actually consume (food, energy, health care....), then this assumption is obviously not correct. I do not believe in conspiracy theories, "black helicopters" or the Easter Bunny, but please recall that there is a precedent, and some would argue a motive, for a government to report lower inflation statistics to reduce the real cost of debt service and transfer payments.
Recall that "volatile" components of food and energy were removed from the inflation index and the concept of "core" inflation excluding these items was created in the 1970s as inflation spiked after the first oil repricing and the U.S. renunciation of gold convertability...the measure of "core" inflation provides the impression that there is no inflation when there actually is and allows the government to pay lower amounts on social security, etc keyed off this lower inflation rate.
2. "Expectations of inflation are well anchored" and "Boiled down, the criticisms of the Fed come dow to ... its policies are leading to hyperinflation"
Expectations can change - call me in a year after all this money printing and we shall see what inflation expectations are --- it is possible for the economy to be mired in recession with high inflation (again, look at the 1970s).
As for hyperinflation -- yes, we would need QE3, QE4, etc for that, however, the precedent being set by the Fed now certainly makes this possible although not probable because of Republican oversight in the House. The very fact that it is possible is an enourmous change in policy....
3. "The Fed...has a dual mandate, to foster maximum employment and price stability"
I always thought "price stability" meant just that....when did "price stability" start meaning 2% inflation anyway? With 2% inflation, over 10 years the value of your money decreases to about 80% of what it was and over 30 years it is halved...
Also, where is the research paper showing the causual link between inflation and employment ??? It simply does not exist.
4. Boiled down, the criticisms of the Fed come dow to two, the second of which is: " its policies...are beggar my neighbor, in consequence, if not intention", per the German finance minister Wolfgang Schuable:
The policy of a government printing money to buy its own government bonds is certainly an attempt to 'beggar my neighbor' as it will most likely lead to a depreciation in the dollar as a government cannot control both interest and foreign exchange rates, at least, not without capital controls...
What is underappreciated here is that a re-rating higher of U.S. soverign risk is an appropriate response, as holders of U.S. assets realize that the continued and capricious policy-making may continue, and that these decisions are being made by a small group of unelected officials with quite a bit of power and discretion....
Why would the money printing continue? Well, what if unemployment does not decrase, or asset prices (the stock market?) decline, or any other dog ate my homework reason the Fed decides to come up with at one of there meetings or between meedings...
Who is to say, but the "Mandarins" at the Fed...or for that matter the Easter Bunny for all that ordinary people know about any of this...
[FT] Martin Wolf: The Fed is right to turn on the tap
