In 2009, Air France Flight 447 crashed while on route from Rio to Paris.  Data from the flight recorder suggest multiple problems led to the disaster.  In a stressful and confusing environment, one of the copilots moved a control stick in the wrong direction, which worsened the problem of the plane stalling.

After a major plane crash, investigators look at the “black box” to determine instruments settings—did the captain make the right decisions?  Thus, suppose the captain insisted that he or she had been unable to lower the flaps, while the flight recorder showed multiple examples of the flaps being raised and lowered throughout the flight.  In that case, one might doubt the captain’s explanation.

Similarly, it may be useful to examine central bank “black boxes”.  Do the movements in their policy instruments match the macroeconomic problems they faced and the goals they wished to achieve?  Do they match any explanation they provide for a failure to achieve those goals?

During the late 2010s, the Fed was fairly consistently undershooting its inflation target.  This led some observers to speculate that the Fed was unable to raise inflation. This is from a 2017 FT article:

Blanchard was prompted to recite his faith in the power of the Phillips Curve by former Fed governor Jeremy Stein, who wondered how central banks were supposed to raise their inflation target to 4 per cent when they are still undershooting the current target of 2 per cent.

Stein is implicitly suggesting an inability to raise inflation rates. But if we look at the Fed’s “black box”, we see nine rate increases between 2015 and 2018.  This rules out “instrument failure”, and instead leads to three possibilities:

1. Like the Flight 447 co-pilot, and like the Prime Minister of Turkey, the Fed was horribly confused.  They wrongly believed that raising the policy rate would boost inflation up to their target.  They pushed the instrument in the wrong direction.

2. Fed officials are corrupt, privately aiming for below 2% inflation even as they publicly insisted that they were targeting inflation at 2%.

3.  Fed officials were mistaken in relying on flawed Phillips Curve models that suggested that inflation would soon overshoot the 2% target without further rate increases.

In my view, the third explanation is the mostly likely, but at least we can rule out instrument failure as an option. The Fed was perfectly able to adjust its fed funds target.

Britney Spears informs us that one romantic affair might be an innocent mistake, but multiple affairs are the sign that you are dealing with a bad girl.  Perhaps this insight can be used when evaluating the black boxes of the Bank of Japan and the ECB.

In the early 2000s, the Bank of Japan apologists insisted that there was nothing the BOJ could do to boost inflation despite its valiant efforts.  But in the year 2000, our black box shows the BOJ raising its interest rate target, despite years of deflation.  Why did it do this?

The small increase in interest rates might have been an innocent mistake.  But the BOJ again increased its interest rate target in 2006, clearly demonstrating that (as Britney would say) the BOJ is “not that innocent”.

ECB apologists insist that the European central bank was unable to prevent the Great Recession.  But the ECB’s black box shows the ECB raising interest rates in mid-2008, right before the economy worsened dramatically.  The black box also shows two rate increases in early 2011, right before Europe fell into a double dip recession.

Of course we know that the level of interest rates is not a reliable indicator of the stance of monetary policy, just as the position of a control lever doesn’t tell you how the position of the airliner is changing.  But when we juxtapose the central bank instrument setting against the clear needs of the economy, we do have evidence of intent.  One mistake might be an innocent error, multiple BOJ and ECB mistakes were evidence of an overly hawkish central bank.

In 1986, CBS News informed us that Audi cars had a problem with “unexplained sudden acceleration”.  One hint that this was actually human error was the fact that hitting the brake seemed to make the problem worse.  In a car, the brake and drivetrain are completely separate systems, making it very unlikely that a mechanical failure could cause the car to accelerate after hitting the brake.  Investigators later speculated that Audi had placed the brake and accelerator pedals a bit closer than usual, and that some drivers had hit the accelerator while intending to hit the brake.

I think of this example when considering Fed apologists who claim that there’s nothing the Fed can do about high inflation, as it’s caused by supply chain problems.  If we look at the Fed black box for 2021, we see a central bank holding their policy rate near zero for the entire year, and continuing (even in 2022!) to inject more and more money into the economy via QE.

Central banks often plead innocent when accused of making major policy errors.  Fortunately, we have independent evidence from central banks black boxes, which clearly demonstrate that they are “not that innocent”.