The A B C of monetary policy

Which statement is correct?

A) Increases in employment leads to increase demand for consumption which in turn forces up prices and inflation.

B) Increases in employment leads to increased output which in turn forces down prices and inflation.

C) There is no relation between employment and inflation

Why do I raise this age-old question? Just listen to some of the statements coming from the US Federal Reserve Governors over the last few days:

Stan Fischer, Sunday Oct 11: “…these conditions entail an initial rate increase later this year…premised on continued solid growth and further improvement in the labor market which are key factors supporting our view that inflation will rise to our 2% objective.” Stan answers (A) to the above

Lael Brainard, Monday Oct 12: “…labor market improvements aren’t a sufficient statistic for judging the outlook for inflation.” Lael answers (C) or (B) or, maybe, (A)…lets say a weak (C)

Daniel Tarullo, Tuesday Oct 13:”Right now, my expectation is, given where i think the economy would go, I wouldn’t expect it would be appropriate to raise rates.” Hmmm…Dan is playing his cards close to his chest by not telling us where he thinks the economy will go. Lets say he is either an (A) or (B), but probably an (A). Definitely not a (C).

A few posts ago I started the #FedDoNothing twitter campaign. This makes me a strong (C), though if I was a Fed Governor I would adopt a (B)-stance because someone needs to fight the (A)’s on their own turf. The frightening reality, however, is that the Fed seems publicly confused and uncommitted to any of the three basic statements which ultimately drive policy.

Without a strong set of beliefs there is unlikely to be a strong policy action. If and when rates rise (or fall?), they aren’t going to rise by much.