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September 26, 2005
Differing opinions on the Fed
Is the Fed risking recession? In James Hamilton's most recent post, he seems to think so. Tim Duy suggests that the Fed is sending a clear message that it will target price stability rather than full employment growth if forced into an either/or choice. I will simply add that managing expectations will matter a lot here. A little bit of aggressiveness against inflation now will help contain inflationary expectations and prevent an incipient downturn from turning into full blown stagflation. In fact, the Fed's management of expectations, while it hasn't been perfect, has probably already kept inflation expectations fairly (well) contained. (Include the word "well" or not, as you like.) That said, it would not be inappropriate to allow the economy to take a breath sometime in the next few months as long as expectations remain in check. But I'm aware that a pause in the rate hikes is not without it's own set of problems.
I'll throw out these questions to the blogosphere: What are the dangers of a pause in the rate hikes? What are the chances that the market would misinterpret it and see it as a signal that the Fed is done raising rates or that they see recession on the horizon? If you were on the FOMC, what would you do between now and the end of the year to minimize that risk? Do you think that these risks would cause the Fed not to want to pause at all, but treat "measured pace" as meaning 25 b.p. per meeting until they feel they're at the neutral funds rate? Would that be good policy?
Yes, those are tough questions. That's why I'm not answering them all here tonight. It is late as I write this, but these questions will be with us for many weeks. I'll come back to them from time to time with my thoughts.
Have at it.
Posted by William Polley at September 26, 2005 01:33 AM
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William Polley asks: “I'll throw out these questions to the blogosphere: What are the dangers of a pause in the rate hikes? What are the chances that the market would misinterpret it and see it as a signal that the... [Read More]
Tracked on September 26, 2005 08:51 PM
» Stagflation from Econbrowser
Do recent energy shocks mean we might see a replay of the 1970's stagflation? I believe not, and here's why.
[Read More]Tracked on October 11, 2005 12:27 PM
Comments
The Fed seems to always risk recession -- they invariably over-tighten, causing you know what.
Indeed, this cycle reveals the opposite problem -- They can also get to loose at the bottom. I cannot recall them ever getting this accomodative since the 1930s. While I am not in the camp that thinks housing is a bubble ala Nasdaq 1999, the huge housing spurt was clearly fomented by 1% Fed Rates . . .
Posted by: Barry Ritholtz at September 26, 2005 05:13 AM
the main danger in a pause to the rate hikes is the collateral damage which would be inflicted on the dollar......
Posted by: jjj at September 26, 2005 07:56 AM
There is no danger in a pause in rate hikes, assuming the accompanying text makes it clear that this is a caesura, not a rest.
If the soldiers are still on the barricades, the longer-term markets won't be worried. It's signs of desertion or fragging that worry generals and markets.
Personally speaking, I'll be more worried (pace Barry R.'s point) if they don't take a month off.
Posted by: Ken Houghton at September 26, 2005 09:37 AM
I am NOT a fan of Greenspan but this is NOT his fault... faced with a wreckless congress & president & profligate public that elects them... what else can he do?
::::
"Federal Reserve Chairman Alan Greenspan told France's Finance Minister Thierry Breton the United States has 'lost control' of its budget deficit, the French minister said Saturday."
http://money.cnn.com/2005/09/24/news/international/greenspan_france.reut/index.htm?cnn=yes
::::
Posted by: dryfly at September 26, 2005 12:09 PM
The Fed seems to have reached the conclusion that the stimulus from katrina reconstruction will be larger then the restrictive impact of higher oil prices.
But if the impact of higher oil shows up as a very weak X-mas while reconstruction does not show up until next year we could be in for a very bumpy ride.
The Fed seems to have suddenly become very worried about inflation expectations. Why?
Is this concern simply because of one bad reading in the consumer confidence data?
Or is it because they expect higher oil prices to feed into higher expectations and in turn into wage setting?
Bonds are still trading within the last two-three year band, so the bond market does not seem to share this increased concern.
Posted by: spencer at September 27, 2005 03:54 PM
With resource utilization growing tighter, the FOMC is correct to stay the course. A cap ex spending cycle is under way. We are currently in an economic pause before the big storm. Blame China; not Greenspan.
Posted by: Jack Miller at September 27, 2005 09:37 PM