Alan Meltzer on the Fed’s Flawed Reasoning

September 23, 2011


When you look at the economy, Professor Meltzer, and you look at a solution to clear the markets, is one of the solutions a little bit more inflation?

Do you agree with Ken Rogoff and Olivier Blanchard – just a little more inflation?

MELTZER: That just moves the unemployment rate from now until later. I mean, you know, I would be happy with anybody who said, let’s have more inflation if they would finish the sentence and say, well, when we get it, how are we going to get rid of it? They don’t say that. so they say, well, let’s solve today’s problem and we’ll worry about tomorrow, tomorrow. I believe in worrying about tomorrow today.

KEENE : Professor Meltzer, are you worried about where core CPI is? Or are you worried about its rate of change, the vector, the direction of inflation?

ALLAN MELTZER, PROFESSOR, CARNEGIE MELLON UNIVERSITY: Both, both. And I’m worried especially about the fact that we have about, for the last six months, we have more than 14 percent M2 growth. So we have all the signs of inflation coming, beginning. We have the devaluation of the dollar. The Fed continues with what has got to be described as immediate policy of trying to lower interest rates.

KEENE: Well, I want to bring in John Ryding of RDQ Economics who agrees with so much of the Meltzer view. Ask a question if you would.

RYDING: It’s absolutely great to actually hear somebody who believes that the Fed has done harm with QE2 and shouldn’t be doing QE3.

I was…

KEENE: Ask a question to Professor Meltzer.

RYDING: What do you find (ph) the Fed say when you’re try inferring (ph) that view to them that they actually caused some of this inflation probably? [They] don’t seem to accept the link from money to inflation anymore.

MELTZER: Well, they don’t believe that because they look at mere short-term data. But if you look at annual data or six-month data, you get a very different story. In my book, I have a chart of base velocity annually from 1917 until 1997, plotted against the interest rates. It looks just the way it should. And it’s sort of a very stable relationship. So the Fed just ignores things like that because they have too much concentration on what’s happening today and tomorrow and not enough concentration. You know, you can read their minutes as I have for years and years and years. You hardly ever hear a discussion in there of what’s going to be the consequence of what we’re doing today.

MELTZER: So we need to give them more confidence about the future so they can have a better idea about the expected rate of return on their capital. And that’s what matters to them – the expected rate of return on their capital. So at the moment, they don’t know what that is.

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