And a rude awakening it has been.
The Fed cut the target for the Federal Funds rate again, this time by 50 basis points. The data released earlier today confirm that the Fed has given up on inflation control: headline CPI inflation was still humming along at 4.1 percent year-on-year in December 2007. Even the misleading ‘core’ inflation indicator favoured, for no good economic or statistical reason, by the Fed registered a 2.7 percent increase.
Much was made in the media of the fact that real GDP growth for Q4, 2007 was only 0.6 percent, the lowest quarterly increase since 2002. This (in my view erratically) low figure should be juxtaposed, however, to the (in my view equally erratically) high figure of 4.9 percent in Q3. The markets had been expecting 1.2 percent for Q4. Looking slightly further ahead than the length of the median FOMC member’s nose would have revealed that inventory decumulation reduced GDP growth by 1.3 percentage points in Q4. This reduces expectations of further inventory disinvestment and is a positive for future GDP growth.
The payroll data were much stronger than expected, with 130,000 jobs added (against market expectations of a gain of 40,000). Together with the buoyant durable goods orders data a few days ago, the balance of the recent real economy information has been stronger than expected. Inflation data have come in both rising and higher than expected.
So what possesses the Fed? Has it become a single mandate central bank, with just the maximisation of short-run real growth and employment, regardless of their sustainability, as its objective?
By now, the neglect by the Fed of the price stability leg of its mandate no longer comes as a surprise. But even fully anticipated mistakes hurt. The US and the world economy will pay the price when, in due course, the Fed has to clean up the mess it is creating by its reckless pursuit of the maximum employment objective.