The Fed's New Playbook--- "Google Search"

In testimony before the Committee on Financial Services, Fed Chair stated, " If the public retains confidence that inflation will come down--if expectations remain anchored--then it will come down. We think that's how it works." If only it were that easy to solve the inflation problem. There was no mention of monetary conditions fueling inflation; it is all about its expectations. Policymakers' new playbook should be called "Google Search."

Federal Reserve policymaking is at a crossword. Policymakers are now searching for a new playbook after failing to recognize or acknowledge any link between monetary conditions and inflation. Policymakers nowadays are betting heavily on people's expectations to determine if the inflation cycle is breaking. Why do we still call it "monetary policy" as there are zero references by policymakers to money?

Several years ago, I researched consumer spending and Google searches. Google searches offer insight into future spending. There is a link, especially with some categories. For example, searching for new and used cars correlates with increased vehicle sales. Also, consumer searches for hotels and plane fares connect with increased travel. Still, they fail to provide accurate data on the scale, whether it's a shift in the mix of spending or an increase in aggregate expenditures. In other words, "Google searches" lack precision on scale and timing, two necessary factors for the Fed as they try to tackle inflation.

Policymakers think inflation expectations have a forward-looking character. Google searches for inflation show a sharp increase, hitting levels not seen in the past decade or more. Yet, why should that be a surprise? History shows that inflation expectations change based on experienced or realized inflation. In other words, expectations are directional with actual inflation.

There are many problems with the new Fed's "Google Search" playbook:

1. It lacks any formal connection between money, the Federal Reserve's main business, and inflation.

2. It is a data-dependent policy, which by definition, reacts late rather than preemptively.

3. It relies on surveys of inflation, which are not predictive.

Although policymakers think they are dealing with a unique inflation cycle and using a different lens (expectations) to judge its success in reversing it, the same remedy of yesteryear is needed---higher official rates. In short, it's the Fed's job to end the inflation cycle, not the people.