Originally posted on Tuesday, January 22, 2013

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Is the Federal Open Market Committee holding monetary policy too tightly?  The president of the Federal Reserve Bank of Minneapolis believes that may be true.  It may be.  It is impossible, under the regime of discretionary activism that currently governs Fed policy making, to know.

Narayana Kocherlakota, Photo Courtesy of the Board of Governors of the Federal Reserve

Bloomberg reports:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank may not be providing enough accommodation given his outlook for prices and the job market.

“Inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated,” Kocherlakota said in the text of remarks prepared for a speech today in Minneapolis. “If anything, monetary policy is currently too tight, not too easy.”

The Federal Open Market Committee last month expanded its bond purchase program and linked policy to economic indicators for the first time, seeking to fuel growth and reduce a 7.8 percent unemployment rate in December. Officials said they will probably end so-called quantitative easing sometime this year, according to minutes of the Dec. 11-12 meeting.

“I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around 7 percent in late 2014,” Kocherlakota said at a forum held at the Minneapolis Fed.

The key inference, however, is that without an objective correlative, such as gold, there is no way for the Fed to know whether it is furnishing precisely sufficient, insufficient, or excess liquidity to the market.  As middleware genius Vivke Randive trenchantly wrote in CNET 5 years ago, it is Time for the Fed to Join the 21st Century:

Briefly put, the Fed’s job is to ensure a suitable temperature in the economy so that inflation expectations and unemployment migrate to appropriate levels. If you applied the Federal Reserve approach to ensuring a suitable temperature in your home, you would turn the heater on and off every three months, overheating or under-heating your house.

That’s precisely what seems to happen to the economy–a not too hot or too cold “Goldilocks economy” is what, in theory, the Federal Reserve aims toward. Ironically, four of the past five tightening campaigns (1973, 1980, 1990, 1994, 2001) initiated by the Federal Reserve resulted in recession.

Only in 1994 did the Federal Reserve avoid recession and achieve the desired goal of a soft landing. Not exactly a record I would want to risk our economic future on, and yet each month we anxiously await another Fed meeting on pins and needles, dissecting whether or not the Fed, using old, stodgy data, will raise rates or hold firm.

While Ranadive was promoting real-time, rather than batch, information processing, his his prescription is for a system that replicates the elegant real-time, distributed nature of information and information processing provided by the classical gold standard.  “The gold standard is a modern, digital, information-sharing, global operating standard.  Moreover, it is a stable, networking, efficient, price transmission system in the form of a stable international monetary standard,” says Lewis E. Lehrman, founder and chairman of the Lehrman Institute.

Without the kind of real-time, real world information such as is provided by the classical gold standard, the Fed cannot possibly know whether its policy is too tight, too loose, or, as happens on only the rarest of occasions, just right.