Former Starbucks CEO Howard Schultz is stepping down from the coffee chain’s board, the company said Wednesday.
“I look forward to supporting this next generation of leaders to steward Starbucks into the future as a customer, supporter and advocate in my role as chairman emeritus,” Schultz said in a statement.
The company said the change was part of a planned transition, but Schultz, 70, didn’t provide a reason for his exit.
Payments to Social Security recipients may increase a bit more than expected in 2024, but an advocacy group says they’ll still fall short of what retirees need.
The Senior Citizens League said Wednesday that the Social Security cost of living adjustment, or COLA, will likely be 3.2% for 2024. That would add about $57 to monthly benefits, raising them to $1,790 for the average recipient, according to the group’s estimates.
The cost of living adjustment is calculated based on an average of the inflation readings for the months of July, August and September. Specifically, it’s based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) published by the Bureau of Labor Statistics.
The CPI-W rose 3.6% in July and 3.4% in August.
Inflation rocketed to 40-year highs in 2022 in the wake of a combination of pandemic stimulus payments, an increase in shopping and spending, and widespread supply chain problems. That prompted the Federal Reserve to raise interest rates at a rapid pace. The benchmark U.S. interest rate is now the highest it’s been in more than 20 years.
That has slowed the economy somewhat in 2023 compared to last year, but inflation remains higher than it was throughout the 2010s.
While Social Security benefits rise annually, the Senior Citizens League contends that the cost of goods and services that retirees need is increasing much faster than benefits are.
The advocacy group says that problem is the most serious for older beneficiaries, as people who retired before 2000 would need an additional $500 in benefits every month just to get back the purchasing power they had in 2000.
The Senior Citizens League previously said the increase for next year could be as small as 2.7%.
While wages for U.S. workers have been growing and are starting to outpace inflation, that doesn’t help people who have retired and are no longer earning a paycheck. And the league argues that most people retire before they’re old enough to receive the full amount of Social Security benefits they would be entitled to.
The Social Security Administration is expected to announce the official COLA increase in mid-October.
Overall, the U.S. Consumer Price Index rose 3.7% in August, according to BLS data released Wednesday. Prices for consumers rose faster last month primarily because gas prices increased, but over the last year, the cost of shelter is up more than 7%. The cost of items like medications and medical equipment have continued to rise as well.
Prices for U.S. consumers grew 3.7% in August compared to a year ago as gasoline prices spiked, according to the Bureau of Labor Statistics.
Inflation was about equal to expert projections, and prices rose at a faster pace than the previous month. On a month-over-month basis, the inflation rate rose by 0.6%, compared to 0.2% in July.
Economists had expected the data to show a 3.6% overall increase in inflation compared to a year ago. Annual inflation has now ticked up two months in a row after 12 consecutive months of decline.
Core inflation, a measurement of cost increases that removes energy and food prices because of their volatility, rose 4.3%. That, too, matched estimates from experts.
The Federal Reserve has been focusing on core inflation recently as it tries to crimp inflation.
Broadly speaking, the central bank’s effort seems to be working. Overall inflation as measured by the government’s Consumer Price Index, or CPI, was 3.2% in July compared to July 2022. Core inflation was 4.7% that month.
‘If you look at what’s going on underneath the surface, core inflation continues to gradually cool,’ said David Kelly, chief global strategist for J.P. Morgan Asset Management. ‘I don’t think people should look at it as some kind of revival of inflation pressure.’
Gasoline prices rose 10.6% compared to July and fuel oil prices jumped 9.1%, according to the federal government. That drove up transportation costs. Both commodities cost less than they did a year ago, however.
Sarah House, senior economist for Wells Fargo, told NBC that gas prices usually fall in August as consumers start to drive less, but this year was a break from that pattern because of cuts in OPEC oil production. That made for a notable increase in gas prices.
Home prices and rents have also been major contributors to persistent inflation, and in August, the BLS’ shelter index climbed 7.3% from a year ago.
Beth Ann Bovino, chief economist for US Bank, said it’s significant that wage gains have been greater than inflation in recent months. That restores a bit of the pricing power that consumers lost as inflation spiked.
‘Overall the big picture is that inflation is much lower overall than last year. The Fed rate hike action has had impact. That said, they’re not across the finish line,’ Bovino said.
Inflation has slowed significantly since last summer, when surging prices for fuels, housing and used automobiles sent the measurement to 40-year highs. Fuel and used car prices have come down.
Overall the big picture is that inflation is much lower overall than we were last year. The Fed rate hike action has had impact. That said, they’re not across the finish line.’
Still, inflation remains higher than it was throughout the 2010s. It’s also well above the Federal Reserve’s stated 2% target.
The persistent inflation contributed to the dramatic increases in interest rates over the last year and a half. The Fed raised rates from just above zero in early 2022 to their current range of 5.25% to 5.50%. That’s the highest since 2001.
Because financial institutions use the benchmark U.S. interest rate to set their own interest rates, mortgage and credit card interest rates are also the highest they’ve been in decades. Interest rates have been historically low dating to the 2007-08 financial crisis, making it harder for people and businesses to borrow.
If inflation continues to cool down, the Fed is more likely to stop raising interest rates for the time being. That’s something investors and business leaders have wanted to see, because they’re worried the steep increases in rates will cause a recession.
The Fed’s moves were intended to stem inflation by slowing the economy. Still, the job market has stayed tight and wages have continued to increase, and there have been few signs that a recession is on the way.
‘The economy does seem to be resilient in the face of higher interest rates,’ said Kelly. ‘Working families are gradually doing a little bit better this year.’
He said that consumers are feeling a ‘squeeze’ from the surge in gas prices, even if it’s temporary, as well as the end of the three-year pause in student loan repayments. But Kelly says economic conditions are pretty good right now: inflation is coming down and the job market is tight, which keeps wages steady.
‘That’s about as good as we can expect,’ he said. ‘The best we can hope for is a soft landing and there’s nothing in this report that tells me we can’t achieve it.’
But the public still feels negative about the economy, and President Biden’s approval ratings on the topic remain low. That’s partly because inflation was so bad a year ago and remains persistent today. It could be one of his biggest challenges heading into his re-election campaign.
And if inflation isn’t clearly on the decline, more rate hikes could follow before long. That would send the cost of borrowing money even higher and weaken the economy further.
‘If you’re seeing rents climbing higher, if you’re seeing some upward pressure on transport prices because demand from consumers remains hot, that’s not what the Fed wants to see,’ Bovino said. ‘The Fed is in the last mile of a two-year marathon, and I think there is nothing to gain if they give up before the finish line.’
A combination of inflation and climbing interest rates seems to be stretching consumers’ balance sheets, but it’s not clear yet whether they’re getting to a breaking point.
Newly released data from WalletHub says U.S. consumers took on $43 billion in additional credit card debt during the second quarter of this year, ending in June. That’s more than triple the average amount of new debt households have taken on in that period since after the Great Recession of 2007-08.
Total credit card debt and debt per household grew by about 8% from the year before, according to WalletHub, a personal finance website. It based its calculations on data from the Federal Reserve and the credit reporting agency TransUnion.
Credit card debt at the average household stood at $10,170 at the end of June. While those balances are rising, the average household has a bit less monthly credit card debt than it did before the coronavirus pandemic took hold in early 2020. Things were also worse before the financial crisis; WalletHub says its all-time high debt reading was $12,412 per household.
Still, the effects of higher interest rates seem clear. The benchmark U.S. interest rate was a little above zero until March 2022, at the end of the first quarter of the year. Then the Federal Reserve began quickly raising interest rates. After the latest hike in July, rates are now in a range of 5.25% to 5.50%, the highest they’ve been in more than 20 years.
That allows credit card companies to charge higher interest rates, making balances tougher to pay off. Data from the St. Louis branch of the Federal Reserve shows credit card interest rates have soared to more than 20%, the highest since the Fed began tracking them in 1994. A year ago, the rate was about 16%.
That might all sound bad, but Ryan Boyle, a senior economist in the Global Risk Management division at Northern Trust, says it’s not as concerning as it appears.
‘I see debts as having risen largely as a function of inflation,’ Boyle said. ‘Even though consumers are carrying larger balances, they are earning higher wages that help them to keep pace.’
In other words, Boyle said, credit card spending is definitely up, but it’s not clear that a lot of Americans are having harder times paying off their balances. WalletHub says that credit charge-offs rose almost 12% in the April-June period compared to last year but that the overall rate of charge-offs is just 3.38%.
He added that in the early years of the pandemic, when Congress approved multiple stimulus payments to the public and people were spending much less on travel or dining out, household finances were usually healthy and delinquencies were very low.
But if the overall picture looks decent, there are some important distinctions to keep in mind. Bill Adams, the chief economist at Comerica, said that the combination of rising salaries and slowing inflation has been good for people in working-age households but that many people have spent down the financial cushion they amassed during 2020-21.
‘Pandemic-era savings are largely spent down for most middle-income and lower-income households,’ Adams said.
And another factor might make the increases more painful for some consumers: The pause on federal student loan payments ended Sept. 1. They were paused in March 2020 because of the pandemic, and the hold persisted for 3½ years.
Student loan balances have already begun accruing interest again, and soon, borrowers will be expected to start making regular payments. Adams said that’s going to hurt lower-income borrowers who took federal student loans but didn’t receive degrees, and it might also cut into spending by people who have advanced degrees and earn higher salaries.
Both of those scenarios paint a potentially worrisome economic picture going forward, Adams said.
‘The restart of student loan payments for those higher-income, young and middle-age professionals could be a big drag on consumer spending by that cohort,’ he said.
The blackout fight between cable giant Charter Communications and Disney is over.
Hours ahead of “Monday Night Football,” which airs on Disney’s ESPN, the companies reached a deal that would allow millions of Charter cable customers to watch the game, CNBC’s David Faber reported Monday, citing sources.
Charter’s and Disney’s stocks, as well as those of media peers including Warner Bros. Discovery and Paramount Global, traded higher Monday morning.
Bob Iger and Chris Winfrey, Disney’s and Charter’s CEOs, said in a joint statement Monday that their ‘collective goal’ is to build a model for the future.
‘This deal recognizes both the continued value of linear television and the growing popularity of streaming services while addressing the evolving needs of our consumers,’ they said.
Iger and Winfrey also thanked their customers for their patience.
Terms of the deal include a discounted wholesale price for subscribers for Disney streaming services and an increase in marketplace, or subscriber fees, paid to Disney. Spectrum customers with the TV Select package will have access to an ad-supported tier of Disney+, according to the companies’ news release.
Channels not in the deal include Disney Junior, Disney XD and Freeform, which are popular options for children and teenagers. Other channels that have been excluded are Baby TV, FXM, FXX, Nat Geo Wild and Nat Geo Mundo.
The dispute had been going on since late August, when carriage renewal negotiations between the two companies broke down and left millions of customers without Disney TV channels, including ESPN, FX and Disney Channel.
At the time of the blackout, Charter had about 14.7 million customers.
As a result, some of Charter’s Spectrum pay-TV customers cut its bundle in favor of internet-TV options like Disney’s Hulu + Live TV or Google’s YouTube TV. In the days after the blackout — which occurred during the U.S. Open and the beginning of the college football season, both of which are featured on ESPN — Disney said Hulu + Live TV signups were more than 60% higher than expected.
The dispute dragged on past the NFL season kickoff Thursday.
Carriage disputes and blackouts are common. But Charter billed the moment Disney’s networks went dark as a more pivotal moment, as it proclaimed that the pay-TV model was broken.
Hours after the blackout began, Charter executives on an investor call pushed for a revamped deal with Disney that would give Spectrum pay-TV customers free access to Disney’s ad-supported streaming apps Disney+, ESPN+ and Hulu.
That in particular seemed to be the sticking point in negotiations.
Disney had responded that its streaming and TV networks weren’t equal because of the original content that premieres exclusively on live TV and its multibillion-dollar investments in exclusive streaming content.
The public tussle has highlighted the issues facing media companies. Cord-cutting has been rampant, and consumers are switching to streaming services fast. Media companies are using content from their pay-TV channels for their streaming services, arguably accelerating the transition.
Yet the fees generated from pay-TV providers like Charter for carrying the live networks are still robust — even if they are decreasing with fewer customers in the bundle — and they are propping up media companies’ cash flow and profitability. Media companies like Disney are still working to make streaming a profitable business.
While providing pay-TV services has long been part of Charter’s business, broadband has usurped it as the cornerstone of its profitability and business. Even as consumers cut the TV cord, they remain as broadband customers.
Winfrey had said the company planned to push for similar terms in coming negotiations with other content companies.
After the blackout, Winfrey said at an investor conference that the discussions with other media content companies were already beginning to take place.
He also reiterated the company’s position that the pay-TV model was broken and at an inflection point.
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Say goodbye to refilling that Coke. McDonald’s is getting rid of self-served soda.
The Chicago-based fast food chain plans to eliminate self-service soda machines at its U.S. restaurants by 2032, McDonald’s confirmed this week. It’s unclear if locations outside the U.S. will follow suit.
In an email to The Associated Press Tuesday, McDonald’s USA said the goal of the change is to create consistency for customers and crew members across the chain’s offerings — from in-person dining to online delivery and drive-thru options.
The company did not specify if any additional factors — such as finances or sanitation — impacted the decision to part ways with its self-serve machines. For years, McDonald’s customers have used the machines to fill and refill their beverages without additional trips to a cashier.
Behind-the-counter soda machines already exist at some other fast food chains — and a handful of McDonald’s locations across the country have also begun the transition. According to The State Journal-Register, which first reported on the company’s plans last week, several locations in Illinois, for example, are starting to phase out self-service soda.
Over recent years, analysts have also pointed to changes in consumer behavior since the covid pandemic — including an uptick in digital and online delivery sales among fast food restaurants. As a result, some chains have toyed with enhancing drive-thrus or strengthening connections with food delivery apps — from Chipotle growing its Carside pickup locations to Domino’s penning a new partnership with Uber Eats.
McDonald’s digital sales — made up of app, delivery and kiosk purchases — accounted for almost 40% of systemwide sales for the second quarter of 2023. Revenue rose 14% to $6.5 billion for the period, the chain reported in July, and net income nearly doubled to $2.3 billion for the quarter — exceeding analysts’ expectations.
Some of those gains may fade a bit in the second half of the year. The price increases that have helped fuel McDonald’s sales in recent quarters will moderate as inflation comes down, Chief Financial Officer Ian Borden said during July’s Q2 earnings call.
The latest inflation report from the Bureau of Labor Statistics will land Wednesday morning, and it’s expected to show consumer prices grew at a steady pace in August.
Economists expect the data to show a 3.6% overall increase in inflation compared to a year ago. That would be the second time the year-on-year inflation measure has ticked upward since July after 12 consecutive months of declines.
On average, the experts expect a 4.3% year-over-year increase in core inflation, a measurement of cost increases that removes energy and food prices, which tend to be more volatile.
The Federal Reserve has been focusing on core inflation recently as it tries to crimp inflation.
Broadly speaking, the central bank’s effort seems to have been working. Overall inflation was 3.2% in July compared to July 2022, while core inflation was 4.7%.
Sarah House, a senior economist for Wells Fargo, said that inflation is gradually coming down but that it ticked higher in August because of cuts in oil production, which led to higher gasoline prices.
‘The most important thing [Wednesday] is what happens not just in terms of the core print, but what are the drivers underneath the surface,’ House said in an interview, referring to the inflation metric that excludes food and energy prices.
‘It seems like momentum is for lower inflation. We still have a lot of disinflationary pressures,’ meaning the current economic conditions are helping steadily drive inflation downward.
Inflation has slowed significantly since last summer, when surging prices for fuels, housing and cars sent the measurement to 40-year highs. Still, it remains higher than it was throughout the 2010s. It’s also well above the Federal Reserve’s stated 2% target.
“The monthly rate of change in both headline and core CPI measures have moderated nicely in recent months, but some of the usual trouble spots remain — shelter, and costs for motor vehicle insurance, maintenance, and repair,’ wrote Greg McBride, the chief financial analyst for Bankrate. The CPI is the consumer price index.
The persistent inflation contributed to the dramatic increases in interest rates over the last year and a half. The Fed raised rates from just above zero in early 2022 to their current range of 5.25% to 5.50%. That’s the highest since 2001.
Because financial institutions use the benchmark U.S. interest rate to set their own interest rates, mortgage and credit card interest rates are also the highest they’ve been in decades. Interest rates have been historically low dating to the 2007-08 financial crisis, making it harder for people and businesses to borrow.
If the Labor Department report shows that inflation seems under control, the Fed is more likely to stop raising interest rates for the time being. That’s something investors and business leaders have wanted to see, because they’re worried the steep increases in rates will cause a recession.
The Fed’s moves were intended to stem inflation by slowing the economy. Still, the job market has stayed tight and wages have continued to increase, and there have been few signs that a recession is on the way.
“We’re seeing the economy overall hold off fairly well in the face of the most aggressive tightening cycle we’ve seen since the early 1980s,” House said.
That having been said, there have been signs the economy is slowing, and the effects of rising interest rate on the economy can take a long time to play out. And if inflation isn’t clearly on the decline, more rate hikes could follow before long.
‘The economy is seen as growing much faster in the current quarter than in the first half of the year,’ McBride wrote. ‘Getting core inflation to 2 percent won’t come quickly.’
In August 2023 the AIER Everyday Price Index (EPI) rose 0.87 percent, lifting the index from 285.2 to 287.7. This was the largest monthly percent increase since January 2023 (0.93 percent). Additionally, 287.7 is the highest recorded index value, besting the previous EPI high of 287.1 registered in June 2022.
AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)
(Source: Bloomberg Finance, LP)
Within the EPI, the largest monthly price increases were seen in motor fuel, housing fuel and utilities, and food away from home. Pet products, housekeeping supplies, and fees for lessons and instruction saw the largest declines in price, month-to-month.
On September 13 the Bureau of Labor Statistics (BLS) released Consumer Price Index (CPI) data for August 2023. The month-to-month headline CPI number rose 0.6 percent versus an 0.2 percent seen the previous month. The increase was in line with surveys, and was the largest increase in 14 months. Core (excluding food and energy) month-to-month CPI rose 0.3 percent versus an expected rise of 0.2 percent.
The largest contributor to the increase in the monthly headline CPI was gasoline, which accounted for over 50 percent of the increase. Shelter, which has now risen for 40 consecutive months, also played a role in the August acceleration of US prices. In the core index, the month-to-month rise was accounted for by rents, motor vehicle insurance, medical, and personal care. Prices for used cars and trucks and recreation declined the most in August.
August 2023 US CPI headline & core, month-over-month (2013 – present)
(Source: Bloomberg Finance, LP)
On a yearly (August 2022 through August 2023) basis, headline CPI rose 3.7 percent versus an expected 3.6 percent increase, compared with a 3.2 percent increase in July 2023. The increase in the year-over-year numbers is accounted for mostly in energy and food price increases. Year-to-year core CPI fell from 4.7 percent in July 2023 to 4.3 percent in August 2023. Again, shelter was a major (over 70 percent) contributor to the increases, as were motor vehicle insurance (up 19.1 percent), personal care (5.8 percent), and new vehicles (2.9 percent). The core CPI increase was in line with expectations.
August 2023 US CPI headline & core, year-over-year (2013 – present)
(Source: Bloomberg Finance, LP)
The core month-to-month CPI increase of 0.3 percent was the first increase since February, and comes at a time where likely Federal Reserve policy moves for the remainder of 2023 are being closely considered. From July 4th weekend until yesterday, the average US gasoline price per gallon has risen from $3.89 to $4.29, a 10.3 percent increase and the highest price since November 2022. But while the increase in gasoline prices was driven more by refining hindrances (owing to the summer heatwave and likely temporary), price increases in air travel, motor insurance, and several other categories were negative surprises. Grocery prices increased, but at the slowest pace (annualized) over two years.
With the release of the data, market-implied policy rates ticked up in the three- to six-month range, indicating higher expectations of another 25 basis point Fed Funds increase toward the end of 2023. Despite some improvements since the apparent peak 13 months ago, consumers and businesses are still contending with 31 months of above-trend rising prices.
With grandchildren who are now 2, 4 and 6 years old, I have had occasion to weather many a “why” question (but, blessedly, less frequently than my kids have). And judging from the substantial online discussion of kids’ “why” stage, I am far from alone.
But in perusing some of that discussion, one comment by psychiatrist Napatia Gettings shifted my thoughts away from how to survive the why stage. She said, “They’re trying to make sense of the world, and that’s a good sign.” It made me remember a phrase I have read, with some variation, many times in Thomas Sowell’s writing, from at least as far back as his 1980 Knowledge and Decisions though his 2009 Intellectuals and Society. He repeatedly pointed out that important aspects of many views, proposals, and policies ran aground on “a question seldom asked, much less answered.”
The trigger for the why stage in children seems to be the explosion of language capability around age three. Once kids have the words to begin expressing new things, their attempts to understand the world snowball. That made me think that we need more people to emulate small children when it comes to politics, because we need far more people to persist in asking why questions when justifications for political choices are not satisfying. That is, with apologies to Dr. Gettings, too many adults have given up trying to make sense of the political world, and that’s a bad sign.
Issues that are rarely asked about, much less answered, are so liberally sprinkled throughout politics that they are part of many Pathways to Policy Failure, to cite my most recent book. So we could use far more persistent why-askers like my grandkids, in the face of the many iterations of “shut up and obey” we have been hearing from our supposed public servants and those eager to curry favor with them.
Consider some of the why questions for policies that frequently occur to me, without good answers given by activists, politicians, and rent-seekers.
Why do politicians laud American voters before elections, but then override so many of their choices as soon as the election is over?
Why should voters expect moving decisions to government will produce better results, when those in government have less information about you and care less about you than you do?
Why is government “help” considered moral or ethical when the resources are taken from others who did not agree to pay for it?
Why is overcoming ineffective or wrong-headed regulations cited so often as a cause of crises, yet new regulations are constantly proposed as “solutions” to crises?
Why does government claim to create jobs with stimulus plans, when all that really happens is that jobs are simply moved from where the resources were taken to where they are then spent?
Why, when raising tax revenue, does the government ignore the distortions caused by doing so (which economists call welfare costs), when they are necessary implications of taxation?
Why, when government spends money, do it count multiplier effects as benefits, but when it raises the money, it ignores the negative multiplier effects on the cost side?
Why are price ceilings considered “solutions” to not enough of some goods being available, when they make suppliers provide even less of the goods in question?
Why do so few people notice that price ceilings and price floors both reduce the quantity of goods exchanged, undermining the political promises of providing more used to justify them?
Why is “greed” used to describe firms’ refusal to provide what some desire, but not those who want firms to be forced to provide what they would not do voluntarily?
Why are firms supposedly too greedy to do what many activists want, but not greedy enough to hire “underpaid” women when that would supposedly be a huge profit opportunity?
Why do people pushing “single payer” in health care not recognize that it is just a different name for “government monopoly?”
Why does government insist that monopoly in markets is bad, but government monopoly is good?
Why do politicians call their spending “investment” when it is taken involuntarily from one group to benefit other groups that politicians choose, which is far different from when I invest?
Such questions come to me with depressing frequency. If you pay attention to public policy, you have probably come up with your own list of “not asked, much less answered” questions that stick with you, because few things are as scarce as answers that are consistent with both logic and government’s advancing the “general welfare.” But the questions keep coming. Sometimes I have wondered there is a question “to rule them all.” I have come up with one candidate for such an august inquiry. Why was Thomas Sowell able to say “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics”?
Writing in the Wall Street Journal, Alan Blinder notes the ambiguities in Fed Chairman Jerome Powell’s recent address in Jackson Hole:
[Powell] can’t give much forward guidance when he doesn’t know what comes next. The Fed is truly data-dependent now, in a way it wasn’t a year ago, and no one knows what the next few months will bring.
Blinder’s analysis of Powell’s strategy is worth careful consideration, but even more important is the worrying truth implicit in his comment: The Fed is flying by the seat of its pants.
On a fiat money standard, the central bank’s chief task is to define money’s purchasing power. This means creating what economists call a nominal anchor: credibly committing to markets that a variable under its control, such as the price level, will follow a predictable path. The best way to achieve this is with a monetary rule. The Fed could, for example, announce a new target for the Personal Consumption Expenditures Price Index (PCEPI), specifying its desired level (and implied growth rate) over a definite time period.
The Fed hasn’t done this, of course. It doesn’t want to be bound by a rule. That would make it too easy to judge the Fed’s performance. It would also constrain the Fed in other ways, perhaps limiting forays into fashionable yet tangential topics such as employment equity or climate justice.
Robert Hetzel recognizes the importance of rules-based policy in his important new book, The Federal Reserve: A New History. Fed monetary policy is discretionary, allowing it to revise its actions “period by period.” This allows it to “control the historical narrative” by convincing the public it is responding “optimally to shocks arising externally.” Hence the perennial guessing game played by FOMC members and market participants, in which market participants devote enormous time and effort to understanding the former, and FOMC members devote enormous time and effort to not being understood.
Things would be very different with a genuine monetary policy rule, which “requires examination of how the rule produces a mutual interaction between the behavior of the Fed and the behavior of the economy,” Hetzel contends. “One can then learn from the past about which rules stabilized or destabilized the economy.” But this is precisely what the Fed doesn’t want. Specifying the monetary standard requires committing to a rule. Committing to a rule significantly lowers the cost of evaluating Fed policy. And lowering the cost of evaluating Fed policy could make it very clear to a great many people that the Fed is up to no good.
The Fed has purposefully strayed from its limited mandate of full employment and price stability. It explicitly targeted the minority unemployment rate, despite the fact that the difference between minority unemployment and average unemployment is structural and thus beyond the scope of monetary policy. Instead of stabilizing the price level, it joined global efforts to fight climate change, despite lacking statutory authority to pursue that goal. It can get away with these things because it refuses to specify the nominal anchor that undergirds the monetary standard. Discretion allows technocratic tinkering. In contrast, rules require strict discipline.
Blinder concludes his article by promising readers that they “will be hearing more of this debate in coming months.” Powell says the Fed will proceed carefully. But, as Blinder notes, nobody is quite sure “what ‘proceeding carefully’ will mean in practice.” Indeed, nobody is sure because Fed officials want us to be unsure. Economic stability and the welfare of the general public are best achieved by rules. But power, prestige, and plausible deniability are best achieved by discretion. Somebody should remind the Fed just whose interests they’re supposed to serve.