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September 18, 2007
Some links to keep you occupied until the big announcement
I've got to get some sleep. I'm going to be pretty busy tomorrow (today, actually). More about that later. For now, Mark Thoma has some posts that are worth looking at. First, he reminds us, via Greg Ip, that the discount rate could be cut (or not) tomorrow as well. We haven't given as much time to that. My own guess is that they will cut the discount rate by as much as the fed funds target. There's an outside chance of a 50 b.p. cut if the funds rate is only cut by 25 b.p., but I'd regard that as less likely. 25 b.p for both seems most likely.
Next, Mark offers an idea to increase transparency.
Here's an idea for additional transparency into Fed thinking. Suppose we require that each of the twelve members of the Federal Open Market Committee (the committee that sets the federal funds rate) post their stance on monetary policy once per day on a central web site.
On the Fed's main web site there would be a page listing each Committee member's answer to the question "If I had to set the federal funds rate today, I would set it at ____" and a table would list all twelve answers along with the last time the answer was updated, Committee members would be required to update their answer at least once per day, even if there is no change, and they could update it more often if desired, e.g. in response to news about the economy (the basic unit of time could be weekly as well). It would probably be best if the votes were anonymous, but that isn't essential.
I have my doubts. There's a nontrivial chance that such a plan would destabilize the market. I mean just imagine how much more volatile futures contracts would be if they were responding to actual forward looking statements about the vote from the members themselves. Then there's the matter of credibility. How would the market interpret frequent changes in sentiment? How would they interpret a sudden reversal, or double reversal? I, for one, am glad that the voting members weren't giving us a day-by-day update on their vote. I don't think it would be helpful to have that play out on a daily basis, especially during a time of crisis. If things get bad enough, have an intermeeting cut. If not, then send the signals through fedspeak and retain some flexibility.
If you want more transparency and accountability, go for an inflation target. Then you might get a little more stability to boot.
As for those futures contracts, Mark does the reporting on that as well. We seem to have settled on 50-50 between a 25 b.p. and 50 b.p. cut.
That's all for now. I'll post in the evening and tell you about what kept me busy.
Posted by William Polley at September 18, 2007 12:53 AM
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Comments
In the interest of fanning wild speculation, it wouldn't have anything to do with a certain bank (Ref: http://tinyurl.com/2mthh7 ) just down the road from you, would it?
Posted by: Ironman at September 18, 2007 8:30 AM
News is out - 50 basis points!
Posted by: pgl at September 18, 2007 1:50 PM
Goodness no, Ironman! But seriously, I'll tell you all about it and my thoughts on today's events after I have some dinner.
Posted by: William Polley at September 18, 2007 7:36 PM
Killjoy! It's getting so you can't start an incredibly improbable rumor on the Internet these days....
Posted by: Ironman at September 19, 2007 9:10 AM