Why Keynesians Never Say I’m Sorry

Keynesians never say I’m sorry—they just make excuses until they can cherry-pick data to show that their destructive policies are working. In this respect our tiresome Keynesian school-marm, Janet Yellen, was in fine fettle upon the Friday jobs report, announcing that a “soft landing” had been achieved. Everything is now hunky-dory on main street, said she, because wages were up by 4.1% versus an estimated 3.2% rise in headline inflation for the 2023.

Let’s see. Here are the values for average hourly wages and the headline CPI indexed to December 2020. As it has transpired, since Yellen and the Biden puppeteers purportedly took over economic policy, the cost of living (black line) has risen 25% more than the average hourly wage (purple line).

Change In CPI Versus Average Wage Since December 2020

Then again, our paint-by-the-numbers monetary central planners apparently believe that the world starts anew every month, quarter and year and that there is no such thing as the actual level of wages and prices. It’s all about the short-run rate of change. Since the inflationary battering of wages that has been underway for several years is now purportedly in the rearview mirror, apparently it just didn’t happen.

To be sure, a few years ago when the shortest inflation ruler available—the core PCE deflator—was running significantly below the Fed’s sacred 2.00% target, the Eccles Building was all for a catch-up of the level. The Fed even announced a policy of targeting inflation to average 2.0% over time, which ukase did not include, conveniently, the exact span of time to be measured.

The Federal Reserve now intends to implement a strategy called flexible average inflation targeting (FAIT). Under this new strategy, the Federal Reserve will seek inflation that averages 2% over a time frame that is not formally defined. This means that after long periods of low inflation, the Federal Reserve will not enact tighter monetary policy to prevent rates higher than 2%. One benefit of this flexible strategy to managing the mandate of price stability is that it will impose fewer restrictions on the mandate of full employment.

Wouldn’t you know it? The Fed switched to “averaging” in August 2020—just months before inflation went soaring to levels not seen since the 1970s. Perhaps they should have held some of this dry powder in reserve rather than keeping their foot on the monetary accelerator in a very badly timed effort to average-up.

Besides that, the reliably stable 16% trimmed mean CPI had actually posted at +2.4% Y/Y in August 2020, and had been above the 2.00% target for 37 of the prior 48 months. And yet the Fed heads insisted on looking a gift horse in the mouth, blathering tediously about missing their inflation target from below and needing to average-up by running the printing press even hotter.