The Objectives of Monetary Policy

In his post at RealClearMarkets Joseph Calhoun questions the present objectives of monetary policy:

I don’t know if we can accomplish the goal of a stable dollar and more stable commodity prices without a gold standard. I’m not even sure we want to; there were still monetary problems under a gold standard although it may be that, like democracy, it is the worst system except for all the others that have been tried from time to time. Maybe we could use a more general commodity index or add some element of asset prices to the Fed’s mandate. I don’t have the answer. But I’m damn sure that what we are doing now is unfair and ineffective. As someone said a few years back, the rent is too damn high. I’d add gas and groceries to that list.

What he’s questioning is that the rate of inflation that the Federal Reserve attempts to control through interest rate adjustments doesn’t include food, gasoline, or rent. There are good reasons for that. They are “volatile” meaning they go up and down quite a bit for reasons that are only very indirectly influenced by monetary policy.

Take gas prices, for example. Those have been rising lately but I don’t think much of the increase has anything to do with monetary policy. I’d say it has more to do with other government policies including environmental policy, trade policy, and foreign policy. Not to mention demand factors. Or food prices. Food prices are almost certainly more affected by gas prices, demand factors, and trade policies than they are by interest rates. I don’t know what it’s like in the rest of the country but here in Chicago tax policy is a major factor in rent increases. So I’d say the most important factors behind rent increases are tax policy, demand factors, and zoning. On a side note I’ve been amused in a perverse sort of way lately by New Yorkers who are nostalgic for the good old days when Times Square was a sewer and you couldn’t walk down the street without getting mugged. At least there were a lot of rent-controlled apartments.

So, while I’m favorably disposed to defining welfare as being more dependent on price stability in food, gas, and rent than iPads, let’s extend the discussion of government policy beyond monetary policy to all of government policy, even those under the control of the do-nothing Congress. In fact to those three I’d add health care prices and the price of education. Our attempts at controlling those have been tragically inadequate and their price increases are little related to interest rates.