Janet Yellen, the Vice-Chairman of the Federal Reserve Board,in a speech delivered today to the US Monetary Policy Forum today in New York, illustrated perfectly how utterly irrational is the Fed’s monetary policy.
Rational thought depends on the premise that causes have effects. For something to cause another thing, both must appear simultaneously, or nearly so. But simultaneous appearance just proves correlation. Two things may appear together every time, but have no relationship to each other, except sharing in some other thing that caused them to simultaneously appear. But here’s the crux of the matter: If two things do not appear together, then one can not be the cause of the other. Without correlation there can be no causation. This is a simple premise that is routinely ignored by policy wonks, social planners and even practitioners of the hard sciences (particularly of medical science).
Yellen today claimed that the Fed’s accommodative monetary policy shaved a percentage point off of unemployment and prevented inflation rates (i.e., the core CPI) from dropping below zero. But is accommodative monetary policy (i.e., low interest rates, quantitative easing, etc) capable of such a thing? Let’s look at the Fed’s own data:
Here’s the Consumer Price Index, less food and energy:
Has the Fed’s monetary stance been accommodative like today throughout the last half-century? Of course not, yet consumer prices have not suffered any sustained decline ever (a leveling of the curve would indicate inflation at zero; a dip would put it below zero). Again, causation requires correlation, but correlation is only indicative of the possibility of causation. Here, increases in the CPI appear regardless of the Fed’s monetary stance. Thus the Fed couldn’t be causing changes in the CPI through its Open Market Operations. If “A” appears regardless of whether “B” is present, B can’t be causing A.
What about Employment vs. Fed Funds rates?
Here’s the overall employment level, which we’ll use as a proxy for unemployment, i.e., higher employment levels imply lower unemployment rates and vice versa:
And here’s the Fed Funds rate:
Total employment growth is necessary if the unemployment rate is to fall, considering the number of workers added to the economy each year, so employment growth is really what the Fed is after. Look at the sixties. Total employment steadily grew with only a couple of blips down during contractions/recessions. But so did the Fed Funds rate. In other words, the Fed Funds rate increased at a time when unemployment declined–the relationship Yellen apparently believes prevails. Now look at the seventies. Fed Funds rates bounced all over the map, decreasing early on, increasing to a point greater than the earlier high, and revisiting the lows. Yet except for a significant blip in the mid-70’s recession and another smaller decline at the decade’s beginning, employment, again, steadily grew. The eighties begin with a significant dip in employment (i.e., increase in unemployment rates) and a huge increase in the Fed Funds rate–something Yellen might need to explain if her claim of lowered unemployment due to Fed monetary accommodation is to enjoy any viability. The eighties ended with steady growth in employment, while the Fed Funds rate dances up and down, but overall, steadily marches lower. The nineties begin with a slight increase in the unemployment rate and a significant decline in the Fed Funds rate. Then Fed Funds recovers less than half its previous peak, while employment climbs throughout the decade. The aughts begin with another significant decline in the Fed Funds rate and a long, shallow decline in employment that is followed by a steady climb in employment and increase in the Fed Funds rate. The present decade sees a crash in both Fed Funds rates and employment, with the total number of employed declining to levels last seen in the early aughts.
Now, step back and take in both graphs together. One makes a camel hump (perhaps two) and the other is the side of a mountain. Employment over the course of time has been on an upward trajectory. The Fed Funds rate started increasing in the sixties, increased through the seventies until hitting a peak in the early eighties, and has been steadily declining since. Is this a correlation upon which the hat of causation might hang? Hardly. Employment and Fed Funds rates show some short-term correlations, but it’s not clear in what causative direction they flow. In the early eighties, Fed Funds increases preceded lagging employment, when the Fed was foremost concerned with inflation fighting. Most Fed Funds declines appeared commensurately with falls in employment, which makes sense, if one considers the Fed controls Fed Funds rates and the Fed seems to believe that decreases in Fed Funds rates will spur employment gains. But long term, there’s really nothing to suggest the Fed’s tinkering with the money has made any significant difference in overall employment.
The Fed would like people to believe that it holds the levers of all that matters in the economic fortunes of humans. But it doesn’t. The Fed’s monetary hijinks have very little impact on either employment or price levels. Effectively all they do is create short-term illusions that queer up price negotiations. Which is what I’ve been saying all along–the Fed can’t create prosperity by the illusion of inflated prices. That we even bother listening to people like Janet Yellen just shows that our longstanding tradition of trusting high priests, shamans and astrologists over empirical evidence retains a robust viability. It’s like the mafia don asks, “Who you gonna believe, me or your lying eyes.” I’ll believe my lying eyes.