Monday, November 19, 2007

Is Dracula in charge of the Blood bank now?

Both the FT and Mark Thoma have noted the apparent disconnect between Fed personnel pronouncements and the expectations/desires of "the markets" regarding next month's Fed funds rate decision.

The FT puts it this way: Fed and markets set to clash on rates
Thoma puts it this way:
Fed Watch: Headed For Another Game of Chicken?

Basically, Fed guys are talking up inflation risks, saying that an economic slowdown is inevitable, and implying or flat out saying not to expect a rate cut, while at the same time that the markets appear to have priced a rate cut as 80% likely.

It also appears that Randy Kroszner, Fed governor and smartest guy in any room I've ever been in, may be caught in the middle. The same day that he gave a "rate cut unlikely" speech, Senate Banking committee chair Chris Dodd announced that was thinking about scuppering the vote on Kroszner's re-nomination to a new term at the Fed.

So "market" and political pressure is turned up on Bernanke and crew. Regardless of the merits (and I don't think another cut is advisable on the merits) I just don't see how they can afford to cut rates again in December in this atmosphere, but maybe they are thinking that they can't afford not to. It has been argued that the Fed has kept its vaunted independence by not really exercising it too often or too vigorously.

PS: someone told me that Dodd was running for president, but that can't be true. I would have heard SOMETHING about it by now, wouldn't I? He would have been in the debates, wouldn't he? How do rumors like this get started?