« Policy thought for the day | Main | Today in History »
April 23, 2005
Donald Kohn makes his position clear
Via Mark Thoma--read here for the whole speech:
But, in the same vein, we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households. In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur. It is through such actions that we aim to achieve our objective of economic stability.
Compare to Sandra Pianalto's comments I reported on yesterday.
A while back I wondered out loud if some folks in the bond market were doubting the Fed's inflation fighting resolve. I'm sleeping better now. The speeches by Fed officials towards the end of the week were probably good words to get on the record.
Posted by William Polley at April 23, 2005 11:17 PM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/203
Comments
Words are easy to say. Adopting a tighter monetary policy that is politically unpopular is the true test of this fed's credibility. They will eventually be tested. And I would bet that when push comes to shove their nice words will be shown to be that much hot air. The only reason that they have gotten away with allowing such large credit expansion in the past decade is that most people still believe them.
Posted by: Mr Cynic at April 26, 2005 12:40 AM
If this were actually true--instead of the minority position speaking publicly, now that the presence of a minority opinion is public knowledge--then we would have expected to see larger increases earlier in the current cycle, instead of the game of Quarters that has been played.
I'll believe the Pianaltos and Kohns if we see 50 on May 3rd or near-term evidence that inflation is controlled in some manner other than suppressing wages. Otherwise, there are 12 Fed governors, and having a Cassandra or two in their midst doesn't change the majority vote to pull the horse inside the Trojan walls.
Posted by: Ken Houghton at April 26, 2005 02:32 PM
Honest minds can differ on whether the resolve is really there and will be there when push comes to shove. (Where were you guys when I was wondering out loud that the bond market might have been briefly questioning the Fed's resolve?) In any case, I think the bond market is (for now) on board with Pianalto and Kohn. If it wasn't, the 10 year yield would be closer to 4.5% than 4.25%. But of course all that can change in a New York Minute on Tuesday.
Our opinions aside, I think 1/4 point on Tuesday is all but a foregone conclusion. And I'll repeat what I have said before. If the bond market is going to react unfavorably to a 1/4 hike when it happens on Tuesday, why hasn't it reacted already?
I'd like to see the term "measured pace" out of the statement on Tuesday in favor of some tougher, but also more conditional, language.
I am sympathetic of your view in that I have for some time thought that a 50 b.p. increase was coming eventually--if you had asked me in February, I might have even picked May 3 as the date. The March meeting, I think, killed any possibility of that now. At first, I thought that was a mistake. And while I have mellowed from that view just a bit, I think that the statement from the next meeting is crucial, perhaps the most crucial in years.
I know what I would want that press release to look like. Will it look the way I want? I guess we'll have to wait and see. (Hint: lose the words "measured pace")
Posted by: William Polley at April 26, 2005 03:46 PM