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Conservative economists are paying attention to the man behind the curtain and not liking what they see. At a meeting in a Manhattan hotel on Nov. 20, the so-called Shadow Open Market Committee criticized Federal Reserve Chairman Ben Bernanke for an ultra-easy monetary policy that will, in their opinion, lead ultimately to dangerously higher inflation.
“We aren’t in Kansas anymore,” said Columbia University economist Charles Calomiris, referring to the mind-bending changes in the Fed’s monetary policy under Bernanke’s chairmanship. That’s not the same as calling Bernanke the new Wizard of Oz, but it’s close.
Marvin Goodfriend, an economist at Carnegie Mellon University, said the Federal Reserve “appears to be walking away” from a commitment it made last January to keep the inflation rate at or near 2 percent. In September, when it announced a new round of bond buying to bring down unemployment, the Fed made no mention of the 2 percent target, merely saying it would pursue its growth target “in a context of price stability.”
“This is a trap,” Goodfriend warned. If the Fed waits to tighten monetary policy until inflation becomes a concern, it will be too late, he said: High inflation will become embedded in the economy and it will take years of punitively high rates to stamp it out.
Jeffrey Lacker, the hawkish president of the Federal Reserve Bank of Richmond, was the Shadow Open Market Committee’s invited keynote speaker. He shared the committee members’ concerns about letting inflation drift much above the 2 percent target in the name of growth, even for a short while.
“At the very least, the precedent set by an opportunistic attempt to raise inflation temporarily is likely to cloud our credibility for decades to come,” Lacker said.
The Shadow Open Market Committee was formed in 1973 to evaluate the policy choices of the Federal Open Market Committee, the arm of the Fed that sets monetary policy. One of its co-founders, Carnegie Mellon economist Allan Meltzer, is still active in the organization and attended the symposium.
Mickey Levy, chief economist for Bank of America and an SOMC member, said that the Fed “has neutralized the bond vigilantes” by keeping rates low. In other words, even if bond traders are worried that inflation will heat up, they don’t dare bet that way by driving interest rates higher, because the Fed will swat them away by pushing rates back down. “The adage ‘Don’t fight the Fed’? It’s in full force,” Levy said.
The Shadow Open Market Committee meeting wrapped up just before Bernanke spoke a few blocks away at a meeting of the Economic Club of New York. Harvard University economist Martin Feldstein, who attended the SOMC symposium, was given the privilege of asking Bernanke questions at the Economic Club luncheon. He did not choose to ask the chairman whether the Fed was walking away from its 2 percent inflation target.
Right after the luncheon, though, Bloomberg TV’s Mark Crumpton asked Feldstein, who was President Ronald Reagan’s chief economic adviser, if he was concerned that the Fed hadn’t been talking about the 2 percent target lately. “Absolutely,” Feldstein said. “It’s very important for the Fed to reaffirm those goals.”