Larry Kudlow frets that Janet Yellen simply doesn’t understand the need for a rules-based Fed model to guide the money supply and interest rates. Ms. Yellen, Kudlow informs us, should “limit her focus to stable prices and a reliable King Dollar.”
“Stable prices”. “King Dollar.” This is rich. I wonder if Asian central bankers would agree with Kudlow’s characterization of the dollar, and whether he’s visited a supermarket lately (he states with a straight face that inflation is 1%).
Here I thought Yellen’s biggest problems might include the wholesale devaluation of the US dollar; asset markets hopelessly addicted to endless rounds of QE; upward pressure on long term interest rates; or staggering future deficits arising from America’s unfunded entitlement liabilities (deficits even the Fed will have a hard time papering over). Apparently, however, it’s a lack of “rules” at the Fed that should keep the new Chairman up at night.
This fetish for rules-based Fed policy (e.g. inflation targeting) and obsession with the Taylor Rule serve as the rightwing, “free market” response to substantive and populist criticism of the Fed itself. We don’t want to end the Fed, the Kudlows tell us, but we do want to keep it in check and maintain the dollar’s lofty status. It just needs a firm hand. After all, as Mr. Greenspan famously told Ron Paul in 2005, the Fed can essentially mimic a gold standard. But how long has it been since the Fed restrained itself in the face of public and political pressure (think Volcker)? And can central banks truly be constrained by rules at all?
We shouldn’t be too hard on Mr. Kudlow. As a former Fed staff economist and later managing director at Bear Stearns, he hardly can be expected to offer more than gentle criticism of the institution that made him rich. And he’s well known as a permabull, using his pulpit at CNBC as a de facto informercial for equity markets. But one has to wonder whether he really believes that tinkering with so-called rules based monetary policy can keep the dollar from going around the bend.
Since Mr. Kudlow effectively supports setting prices (interest rates) and quantities of a particular commodity (money), I wonder what his objection would be to having a quasi-private group of individuals determine how many bushels of wheat should be produced in 2014? Or the hourly wage of a factory worker at Ford? Or the retail price for an iPhone 6?
Interesting questions, but I’m sure Kudlow would say “Oh that’s different.”