Monday, September 17, 2007

Dear Ben: Do something bold tomorrow

Tomorrow is the showdown at the OK Corral for Bernanke and the FOMC. I personally think Bernanke is a terrific economist who has inherited a truly tough situation and done well so far.

I think the Fed would be best served by making a clear stand one way or the other. Either hold steady against moral hazard and inflation or make a real, significant, sizeable rate cut to try and forestall (or minimize) a recession.

A .25 rate cut doesn't do anything really, it's the conventional wisdom, but really it's an empty gesture that leaves the Fed's intentions unclear, and people on both sides of the issue dissatisfied.

So stand pat or go big I say! Personally, I'd stand pat. I'd send a clear message that, as long as I am Chair, the Fed will focus on inflation first and foremost, but I could accept a clear signal of the other kind.


Anonymous said...

What Inflation?

The Fed's job, in so far as it is restricted to considerations of price stability, is price stability.

Given current conditions, isn't the risk of deflation at least as great as the risk of inflation?

If you think not, why do you believe we face a serious risk of inflation?

Angus said...

Hi. thanks for your comment. as to "what inflation"? from the link you posted comes the following:

"During the first seven months of 2007, the CPI-U rose at a 4.5
percent seasonally adjusted annual rate (SAAR). This compares with an
increase of 2.5 percent for all of 2006."

That's inflation, innit? I don't think there is any risk of deflation near term nor have I seen/heard anyone claiming a deflation risk.

If commodity prices and energy prices are rising, the dollar is falling and the Fed eases policy, when unemployment is well below 5%, that to my mind is a step on the road back to the 1970s.

Anonymous said...

Hi Angus, thanks for the response. I am not trying to be difficult, but isn't the core inflation over last seven months 2.3 percent, compared to 2.6 percent in same period of 06? The figure you cite is driven entirely by energy prices, which are in turn largely driven by the weaker dollar and demand factors. So, isn't this a deceleration of inflation?

What am I missing here?

Also, I see your point re the 70s, but am not sure that's the right analogy. Seems like we always try to fight the last war. Yet, we are not in a oil shock world; we are in a financial system freeze world. Hence, why isn't 1929 a useful analogy? That sure seems to be the one that Bernanke holds dearest and has some obvious parallels.

Finally, might a little inflation be a reasonable risk to accept to avoid wider disruption in the financial system? Do we need to be so Andrew Mellon here?

Maybe you could blog on the Fed's decision and elaborate on what you think about its likely impact. As I said, not trying to be difficult, just trying to understand where we are headed.