• 752 days Will The ECB Continue To Hike Rates?
  • 753 days Forbes: Aramco Remains Largest Company In The Middle East
  • 754 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,154 days Could Crypto Overtake Traditional Investment?
  • 1,159 days Americans Still Quitting Jobs At Record Pace
  • 1,161 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,164 days Is The Dollar Too Strong?
  • 1,164 days Big Tech Disappoints Investors on Earnings Calls
  • 1,165 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,167 days China Is Quietly Trying To Distance Itself From Russia
  • 1,167 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,171 days Crypto Investors Won Big In 2021
  • 1,171 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,172 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,174 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,175 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,178 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,179 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,179 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,181 days Are NFTs About To Take Over Gaming?
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Michael Pento

Michael Pento

Pentoport

Michael Pento produces the weekly podcast "The Mid-week Reality Check", is the President and Founder of Pento Portfolio Strategies and Author of the book "The…

Contact Author

  1. Home
  2. Markets
  3. Other

Fed's Dual Mandate Not Working

We are all aware that the Fed has a dual mandate of stable prices and maximum employment. But what may come as a surprise to most is that they have a distinct preference in their mandates. The Federal Reserve under Ben Bernanke has a clear bias towards fulfilling the goal of maximum employment. Given the situation where unemployment is high and prices are relatively stable, the Fed has opted to pursue a policy of pursuing higher inflation in the hopes of engendering lower unemployment rates.

What the Fed doesn't understand is that full employment can exists 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 importantly, an increasing rate of inflation actually increases the rate of unemployment. Not only do these facts make sense economically but also are borne out in the historical data.

Each and every time the Fed has increased the money supply and sent prices rising the rate of unemployment has risen not decreased. The simple reason for this is that inflation diminishes the purchasing power of most consumers. Falling real wages means less discretionary purchases can be made. Falling demand leads to increased layoffs and the unemployment rises as economic growth falters.

The 12.2% Y.O.Y. rise in CPI that occurred in November of 1974 led to the cyclical high of 9% unemployment during May of 1975. Likewise, in 1979 the Y.O.Y increase in CPI reached a high of 14.6% in March and April of 1980, which was followed by another cyclical high 10.8% unemployment print in November and December of 1982. Once again, Y.O.Y. CPI increased from 1.2% in December 1986 to 6.4% in October of 1990. That again corresponded with the rise in unemployment that occurred from the 5% level in March of '89 to 7.8% in June of '92.

Today, we find that the unemployment rate is 9.1% due to the credit crisis and Great Recession. Bernanke believes he can bring that figure down by creating inflation. He has become successful in bringing YOY changes in PPI to 6.9% and CPI to 3.9%. Inflation has now arrived. However, the rate of unemployment will only increase from here as long as the Fed mistakenly holds the belief that printing money can solve the employment situation. Quite the contrary, it only causes the dissolution of the middle class.

In reality, the Fed needs to uphold only one mandate; that of stable prices. Fulfilling that mandate by keeping in check the growth of money supply is the only way to ensure our economy displays full employment and maximum economic growth.

 

Back to homepage

Leave a comment

Leave a comment