Most Central Bank watchers know that our Federal Reserve has a dual mandate of stable prices in the context of maximum employment. But its use of the words “stable and maximum” is somewhat misleading. For instance, one would assume that “stable” inflation would lead the Fed to pursue no change in prices and “maximum” employment would be a rate targeted at 0 percent unemployment; but this is not the case.

For some antithetical economic reason central bankers have unanimously redefined stable prices as adopting a 2 percent inflation target. The Fed has also morphed the term maximum employment rate to mean a 5-6 percent unemployment rate, clinging to the misguided belief that full employment is the progenitor of inflation, despite no supporting economic or historical evidence.

For instance, the 12.2 percent (YOY) rise in the CPI in November 1974 led to the cyclical high of unemployment in May of 1975, which also coincided with the 1973-75 recession. Likewise, in 1979, the YOY high in CPI of 14.6 percent was followed by another cyclical high in unemployment of 10.8 percent in late 1982. 

The Misery Index hit a high of 20.76 during 1980. And one now has to wonder what the true Misery Index (the unemployment rate plus the inflation rate) would be if both inflation and unemployment were calculated properly.

What the Fed doesn’t understand is that full employment can exist 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 important, an increasing rate of inflation increases the rate of unemployment.

This condition plagued the United States during the majority of the 1970’s and early 1980’s and was “affectionately” referred to as stagflation: rising inflation that is coupled with a high unemployment rate and low to negative economic growth.

But Janet Yellen isn’t going to have to dust off her eight track of KC and the Sunshine Band to evoke the 1970’s; she is creating 70’s style stagflation with her monetary policies.

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