Wednesday, January 30, 2008

Another Fed Cut??

I am fairly stunned by the prospect of another Fed rate cut only a week after the 75 basis point bombshell Ben already dropped between meetings.

As I've said here before, the situation still seems more like a crisis of confidence in financial markets than a down on the ground real economic recession. That is to say, the Fed should be focussed on its lender of last resort role for banks (which it has been doing with its auctions of reserves) and not its recession fighter role.

It's not just foaming at the mouth nut-jobs who feel the Fed is now more or less targeting the stock market, Here's Willem Buiter from the LSE writing in the FT:

It is now clear beyond a reasonable doubt that the Fed wants to prevent sudden sharp drops in the stock market. It has not, however, drawn the logical conclusion from this endogenous widening of its mandate. So instead of pussyfooting around with 75 basis point cuts in the target for the Federal Funds rate, I propose that the Fed put its money where its heart is by engaging in outright open market purchases of US stocks and shares.


Even though the initial estimate of 4th quarter GDP growth is a puny 0.6%, December durable goods orders were robustly up, Unemployment is still under control, new jobless claims are still under control. I continue to believe that inflation is a potentially serious problem that the Fed is exacerbating. Since August of 2007 the Fed Funds rate has been lowered from 5.25 to 3.5 and allegedly will go to 3.00 later today. At the same time CPI inflation has risen from around 2.5% to over 4%.

Even the Fed's own weird PCE (personal consumption expenditures) inflation minus everything that's going up measure is rising and it's being reported that the Fed may deliberately set real interest rates negative using even that measure of inflation. Just to be clear, this has already happened using regular data, the point is that soon the Fed will have to admit that they have pushed real rates negative even using their contrived "preferred" inflation measure.

Many people believe a major contributing cause to the financial problems we face was the Fed under Greenspan keeping rates too low for too long. Now we are going to fix or limit the effect of those problems by again creating negative real interest rates. Hmmmmmmm......


Anonymous said...

An insightful economist once noted: "I find a significant four-year electoral cycle in money growth even when controlling for the influence of interest rates, income, and budget deficits" (Grier, AJPS 1989)

The previous bottom of Fed Funds occurred in 2004; the bottom prior to that was 2000. Now here we are in 2008.

So, I guess the two questions that occur to me are (1) why are you so surprised? And (2) why do you place the blame on (a) Greenspan and (b) Bernanke?

Angus said...


very nice. I do find it surprising that almost no one is mentioning political pressure as a reason for these cuts. I have mentioned it here before and should have mentioned it in this post too.