...We can trace the origin of the current Fed situation to a drift away from those two mandates. This occurred sometime in the 1990s, when then FOMC chair Alan Greenspan somehow began focusing on markets, asset pricing and a nonsensical catchall “investor confidence.”
In other words, Greenspan got comfy with his Ruling Class status. Note well: Easy Al was FRB chair under both Clinton and Bush; it's just as easy to say that he was 'apolitical' as it is to maintain that he was the money-launderer for the Party Of Government. Could be that both are true.
Ritholtz has another observation:
...With the Fed Funds rate at 6% in late 2000, the Fed began slashing rates in January 2001. They made 8 rate moves between January and August 2001, cutting rates in half to 3%. Note this was all prior to 9/11. I believe Greenspan panicked, taking rates all the way down to 1.25% following the attacks.
Well. Now that there's one "precedent," Bernanke sets another one: announcing that the Fed will maintain damn-near-zero rates for 'two years.' (By the way, THREE Governors voted 'no' on that).
That's the first time in my memory that an FRB chair has gone that long. Maybe he's trying to provide predictability for a jumpy market; maybe his inner 'predictive economist' has escaped its confines. Maybe he was drunk.
He just bet several umptyzillion dollars that there will NOT be any inflation for the next two years, no way, no how. Struppster would agree with him; so would Ticker, who claims the Bond Bandits telegraphed that message.
But it's a helluva big bet for a helluva long time if you're a Fed chair.