Fed's Dual Mandate Not Working

By: Michael Pento | Wed, Oct 19, 2011
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We are all aware that the Fed has a dual mandate of stable prices and maximum employment. But what may come as a surprise to most is that they have a distinct preference in their mandates. The Federal Reserve under Ben Bernanke has a clear bias towards fulfilling the goal of maximum employment. Given the situation where unemployment is high and prices are relatively stable, the Fed has opted to pursue a policy of pursuing higher inflation in the hopes of engendering lower unemployment rates.

What the Fed doesn't understand is that full employment can exists in perfect harmony with stable prices. That's because having more people producing goods and services can never by itself lead to an environment of rising aggregate prices. And, most importantly, an increasing rate of inflation actually increases the rate of unemployment. Not only do these facts make sense economically but also are borne out in the historical data.

Each and every time the Fed has increased the money supply and sent prices rising the rate of unemployment has risen not decreased. The simple reason for this is that inflation diminishes the purchasing power of most consumers. Falling real wages means less discretionary purchases can be made. Falling demand leads to increased layoffs and the unemployment rises as economic growth falters.

The 12.2% Y.O.Y. rise in CPI that occurred in November of 1974 led to the cyclical high of 9% unemployment during May of 1975. Likewise, in 1979 the Y.O.Y increase in CPI reached a high of 14.6% in March and April of 1980, which was followed by another cyclical high 10.8% unemployment print in November and December of 1982. Once again, Y.O.Y. CPI increased from 1.2% in December 1986 to 6.4% in October of 1990. That again corresponded with the rise in unemployment that occurred from the 5% level in March of '89 to 7.8% in June of '92.

Today, we find that the unemployment rate is 9.1% due to the credit crisis and Great Recession. Bernanke believes he can bring that figure down by creating inflation. He has become successful in bringing YOY changes in PPI to 6.9% and CPI to 3.9%. Inflation has now arrived. However, the rate of unemployment will only increase from here as long as the Fed mistakenly holds the belief that printing money can solve the employment situation. Quite the contrary, it only causes the dissolution of the middle class.

In reality, the Fed needs to uphold only one mandate; that of stable prices. Fulfilling that mandate by keeping in check the growth of money supply is the only way to ensure our economy displays full employment and maximum economic growth.

 


 

Michael Pento

Author: Michael Pento

Michael Pento, President
Pento Portfolio Strategies

Michael Pento

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS) and author of the book "The Coming Bond Market Collapse." PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

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