Saturday, April 28, 2012

Rating the Fed

There are many ways the Fed could be rated. This is simply my attempt based on the dual mandate of maximum employment and price stability.

Click to enlarge.

Start with the unemployment rate. That's the easy one. It's just the area in red. The less red the better.

Now compare the amount the CPI changes in the given month to the typical amount the CPI changes in a month (the median change is roughly +0.26%), then annualize the difference. This is the blue CPI instability part of the chart. Stack it on top.

For example, in November of 2008 the @#$% hit the fan. The CPI dropped 1.79% that month. The CPI typically rises 0.26% per month (+3.2% annualized). The difference was therefore 2.05%. Annualized that's 27.6%. Oops!

As far as my rating system is concerned, the goal for the Fed is to minimize the combination of the two. Needless to say, they haven't been doing great in recent years.

I should also point out that the Fed doesn't actually give us price stability. All we get, at least in theory, is price predictability. I'd settle for that if they can deliver. The last thing anyone needs right now is even more uncertainty and chaos.

And lastly, as of January the Fed claims that their inflation target is now 2.0%. That works out to +0.17% per month. Seeing as how they've overshot the target in both February (+0.41%) and March (+0.29%), I think I'll stick with the median value until I see more evidence. Talk is cheap.

Source Data:
St. Louis Fed: CPI
St. Louis Fed: Unemployment Rate

No comments: