Meltzer Says Fed Is Looking at Wrong Measures on Inflation

The Federal Reserve is wrong to focus on low measures of consumer-price inflation because such indexes are distorted by the method used to calculate rents, said Allan Meltzer, a historian of the central bank.

“Inflation is a problem in the U.S.” Meltzer, a professor at Carnegie Mellon University in Pittsburgh, said today in an interview on Bloomberg Television’s “Street Smart.”

“The reason the Fed gets away with saying we don’t have much inflation and the core is really low is because” the indexes look at “what people would have to pay in rent if they rented their house,” Meltzer said, referring to a component of the index known as owners’ equivalent rent. “But that’s not a price, like the price they pay at the gas pump, the grocery store, at the health clinic.”

Meltzer said the Fed lacks a strategy to reduce its balance sheet, which rose to $2.63 trillion last week as it pumped money into the financial system to boost the economy.

“The Fed doesn’t have a program, that’s the problem,” Meltzer said. “When it talks about how it’s going to handle the inflation it mumbles something about selling six-month CDs to money-market funds and it experiments with that, but that’s not going to do the job and they should know it’s not going to do the job.”

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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