The Fed’s no-surprises approach to monetary policy

So should I go with gloomy or sunny?

Gloomy. Bernecke just made the same mistake that Greenspan did in early 2001 — cut rates in an effort to avoid/delay a recession for political reasons (this time, its an attempt to prevent the GOP from hemorrhaging even more seats in Congress in 2008).

Cutting rates at this point in an effort to free up more capital for mortgages is simply insane — we’re still in a period where the full extent of the damage remains unknown, and lowering rates in a time of uncertainty isn’t going to change market psychology, which will remain risk averse until those risks are more clearly defined.

…not to mention the fact that the last thing the economy needs right now is more downward pressure on the dollar. The net result here is that its an attempted (and almost inevitably unsuccessful) bailout for the big banks/brokerage houses and their wealthy investors, at the inevitable expense of those in lower income brackets who depend on cheap imports for basic necessities.

(I mean, I’m sure that someone like you doesn’t spend much time in “Dollar Stores” — but I do, and over the last six months “true” dollar stores — where everything was a dollar — have ceased to exist. Now, anywhere from 10%-40% of the merchandize on the shelves is marked with prices that are more than a dollar — and a business model that depended on low operating costs (more clerks needed to mark prices on goods, more cashiers needed because each item has to be checked to see if its more than a dollar) is going to go the way of the dinosaur.)

like a pretty girl who demands surprises but only pleasant ones,WALL STREET was hoping for a half a point cut , and the sighs are rather audible right now.

the quarter point cut was already factored in the indices , and monetary policy is not an activity that SHOULD be speculated upon .

Speaking from India, the global impacts of this years monetary policy were-

1) Drove the dollar down and rest of the world up the wall.

2) The Greenspanian rate cut chickens came to roost only to be delayed by the Fed , and the magnitude of cumulative red.

3) Global outflows into Asia continued to drive Asian economies to worry how to control them.

The fed’s rate cut has a global impact now, with GLOBALLY stock exchanges speculating on it. Rate cut leads to flight of dollars into economies with higher rates (read asia) and also gaining currency profits in the momentum.

Ben Bernanke is no Alan Greenspan.Just like George Bush is no JFK (on tax cuts!).

If the Fed is cutting rates to help the Republicans, why has SF Fed President Janet Yellen, who was chairman of Clinton’s Council of Economic Advisers for a while, been one of the most outspoken voices in favor of more cuts? Why did Boston Fed President Eric Rosengren, a lifelong Fedhead who is certainly no GOP operative, vote for an even bigger rate cut at yesterday’s meeting?

The Fed is cutting rates because the economy is slowing dramatically, the FOMC members are scared that things could get much worse, and they figure that inflationary pressures will recede as the slowdown proceeds. They may be wrong about that last part, but this isn’t some hack partisan undertaking. Bernanke knows as well as anbody that any hopes he might have of continuing as Fed chairman are more likely to depend on pleasing a Democratic president than a Republican one.

I guess today’s announcement (12 December 07) kind of blows the “no surprise Fed” theory out of the water. Neh?

/Keith

Bernanke has the job until 2010, and has a position on the Fed through 2020. Indeed, four out of five of the current board members will be on the board until at least 2014, and with two vacancies on the board right now, the next President will have an opportunity to pick only one board member (Krozner’s term expires in January 2008).

As for the economy ‘slowing dramatically’, with 2nd quarter GDP growth at 3.8%, 3rd Q at 4.9%, and the recently released Business Roundtable report showing that corporate executives foresee steady growth this quarter, I’m not sure where that is coming from.

http://www.businessroundtable.org/newsroom/document.aspx?qs=5896BF807822B0F19D4428522FB51711FCF50C8

admittedly, the impact of oil prices, the mortgage scam, etc. are projected to result in much slower economic growth in the not too distant future, but from the data I’ve just found, the impact has yet to be felt. The fed board itself notes “Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending”, but IMHO the “softening in business and consumer spending” is based on uncertainty about the impact of the mortgage scams.

In sum, there is solid evidence of inflation — and even greater inflationary pressures coming down the road, scant evidence of a current recession (but good reason to believe that one will occur by mid-election year) — and the projected recession is the result of uncertainly about the extent of the fallout of the ‘mortgage crisis’. Dropping interest rates isn’t going to address that uncertainty — but may be enough to push the coming recession back to the point where it won’t influence GOP chances in Congress (while also helping to bail out the wealthy investors in financial institutions that are vulnerable to the ‘mortgage crisis’.)

(if you’ve got more recent numbers, I’d be happy to see them).

(and seriously, after 7 years of the Bush administration, do you really think there is any corner of government not full of political cronies/hacks? Just because some non-hacks like Rosengren think a policy is best for non-political reasons doesn’t mean that the Bush appointees on the board aren’t more concerned with short term political considerations…)

Justin…
Where are you getting your “economy is slowing dramatically” data from? Economic growth in the 3rd Q was strong, and the Business Roundtable report released last week said that corporate execs expected sustained growth for the 4th quarter. (in other words, while I agree that all signs point to an unavoidable recession, I don’t see the actual evidence yet.)

(Oh, and just because Fed Bankers chosen in liberal cities like San Francisco and Boston may think something is appropriate for good reasons doesn’t mean that the hacks appointed by Bush to the Fed Board aren’t acting politically. Four out of five of the Board members have terms expiring in 2014 or later–and all five current members were appointed by Bush. Given Bush’s record of appointing cronies, hacks, and political operatives throughout the rest of the government, do you really expect anyone to believe that the FED is any different?)

I guess today’s announcement (12 December 07) kind of blows the “no surprise Fed” theory out of the water. Neh?

as Glenn Reynolds would put it, “heh.”

I think Floyd Norris at the Times nails it…

http://norris.blogs.nytimes.com/2007/12/12/fear-at-the-fed/

To put that in English, the Fed will lend money to banks based on almost any asset they own, even ones that are not liquid at all. That evidently will include some of the more exotic loans and securities out there…. This move is taken as evidence that central banks are determined to rescue the system, whatever it takes.

or, to put that in plain English, Bernacke and his Bush appointed cronies are bound and determined to bail out a bunch of fat cats whose greed got the better of them, and transfer the risks to US taxpayers.

Hey justin, every time I try to post something with a link, it goes into the black hole of Time.com moderation…. what’s up with that?

same here..no links seems like an automated feature enabled here…

in addition whenever i write a comment praising obama it gets moderated ..just kidding

The software pretty much automatically assumes that links=spam (and 99 times out of 100 they do). I’ve been lax about trolling through the junk file and rescuing stuff; I’ll work on that.

Comments found and rescued. Of 201 comments shunted into the junk file over the past two days, four (one from ajay, two from p_lukasiak, and one other on another post) were for real.

Bernanke has the job until 2010, and has a position on the Fed through 2020. Indeed, four out of five of the current board members will be on the board until at least 2014, and with two vacancies on the board right now, the next President will have an opportunity to pick only one board member (Krozner’s term expires in January 2008).

Fed governors other than the chairman rarely stick around for their full 14-year terms. It’s just not that exciting a job, and the pay’s low relative to the opportunities out there for somebody with “Fed governor” on his/her resume. Also, by tradition the most influential FOMC member after the chairman is the president of the New York Fed, currently Clinton administration veteran Tim Geithner (and Federal Reserve Bank prezzes do tend to stay in their jobs; I’m pretty sure they’re our nation’s highest-paid government officials). Also, while Bush has given jobs to lots of people whose only qualifications were their political views, his Fed appointments have for some reason been of a higher standard. Three of his choices–Bernanke, Don Kohn, and Rick Mishkin–would have been at the top of pretty much anybody’s list of most-qualified possible candidates.

Of course, that was true of Arthur Burns, too, and he totally caved to political pressure from Nixon. But the partisan political explanation for the Fed’s current behavior just isn’t remotely convincing to me. They may well be doing the wrong thing (guess we’ll know in a few years), but that’s not why they’re doing it.