If a discussion of the monetary policy of the Federal Reserve doesn't interest you, you may as well stop now.
I've been reading a book by Alan Greenspan (former chairman of the Federal Reserve), and it's interesting to discover how he rose to one of the highest positions in the land for an economist. It's also interesting to consider the insight into the mindset of the Federal Reserve that it offers.
So when I read this article in the New York Times about current chairman Ben Bernanke, I'm both shocked and not-at-all shocked by the views it openly airs - namely, that the Fed needs to cut interest rates to stimulate the economy.
Inflation is a beast that I think the Fed considers much stronger than people on Wall Street seem to. Consider:
The statements issued by the Fed’s policy makers after each recent rate cut have stopped short of declaring that the greatest risk to the economy is on the downside. Such phrasing would be a clear signal that inflationary pressures were not a significant concern among the policy makers and that another rate cut was likely, to avoid a recession. So far, the statements have talked only of economic growth slowing or of “increased uncertainty surrounding the outlook for economic growth and inflation.”
“They are too caught up in the nuances of the language they use,” said Mickey D. Levy, chief economist at the Bank of America.
I really find it hard to think that some of the brightest economic minds in the country are sitting around trying to enjoy their 10-cent words. The rather obvious answer is that they consider inflation to be a significant risk. Sometimes, recessions are the lesser of two evils, and giving up the very-well contained inflation expectations to throw money at the economy is probably the last thing that the Fed wants to do.
Given that low interest rates fostered profligate loans, which fed the housing bubble, until everything popped I'd say about the last thing the Fed needs to be doing is a slash-and-burn interest rate reduction. Inflation is already above the comfort level, and the effects of $100-per-barrel oil will work their way through the economy, causing further inflation in prices.
A panicky Fed would destroy confidence in the dollar, and cause serious long-term problems, even 10 or more years in the future. Is this really something that Wall Street wants?
Thursday, January 10, 2008
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3 comments:
As an arm-chair economist, I never quite understand why there’s not more consensus among econ-educated people (assuming both Wall Street and the Fed are econ-educated) about what the right next step is.
Btw, nice use of the phrase “slash-and-burn interest rates.” Takes me quickly back to my Freshmen year in the Anazari Business building, between Econ classes and Anthro classes, where I first heard the turn “slash and burn agriculture.”
I think there would be more consensus if both groups had the same goals.
But the goals for the chief economist of BoA and the goals of the chairman of the Fed are quite different.
I wouldn't be surprised if private-sector economists were over-stating their case, hoping that the Fed would be influenced slightly in that direction.
But at the moment, I think banks saying they need much lower interest rates is like a junkie saying they need another hit.
The root difference of opinion, I think, is inflation. I wouldn't be surprised if behind closed doors, the Fed is pretty worried about inflation, so I strongly doubt that speeches saying "we don't think inflation is a problem at all" are forthcoming.
Btw, this is funny, referring to banks as junkies wanting a hit.
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