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November 09, 2005
What Is The FOMC Up To?
Ben Jones at The Housing Bubble 2 reports that the Kathleen Hays thinks she knows:
No Federal Reserve official could ever publicly admit it, though everyone in the financial world seems to believe that it's true: the Fed is going to raise rates until it's taken the heat out of the housing market.
Coincidentally, Reuters reports that the president of the Federal Reserve Bank of Cleveland had this to say following a speech today:
The Federal Reserve has not set a numerical goal for its benchmark interest rate, Cleveland Fed President Sandra Pianalto said on Wednesday, adding the central bank will be guided by economic conditions.
Now, you might speculate that "economic conditions" is code for when the "heat" is taken out of the housing market. But you would be wrong,
"Our statement says we are continuing to remove that accommodation by continuing to change the fed funds rate," she said.
"Where we determine we are no longer accommodative again depends on economic conditions." These include both the strength of growth and the need for price stability, the Fed official added.
That seems like a pretty straightforward statement, and to the best of my knowledge no FOMC participant has listed extinguishing housing-heat as the driver of monetary policy or the benchmark for the federal funds rate ceiling. The way I see it, you can either trust the plain talk of the people actually making the decisions, or the mind-reading capacity of the media pundits. Take your pick.
November 9, 2005 in Federal Reserve and Monetary Policy | Permalink
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Posted by:
Edward Hugh |
November 10, 2005 at 06:34 AM
"The way I see it, you can either trust the plain talk of the people actually making the decisions, or the mind-reading capacity of the media pundits. Take your pick."
Well.... the people making decisions are not exactly renowned for plain talking (otherwise what does the expression "Fedspeak" refer to). Greenspan clearly is the master here, and it is between the speeches not between the lines that you need to read.
At the other end, the only alternative we have is not 'media pundits', there are serious working economists who form opinions and voice them.
The most recent example is MSs Joaquim Fels on Tuesday:
http://www.morganstanley.com/GEFdata/digests/20051108-tue.html#anchor0
Global: Is Global Excess Liquidity Drying Up?
A couple of tasters, but I think the whole article needs reading.
"While there are good fundamental reasons to be bearish on bonds (higher inflation) and risky assets (slower economic growth), excess liquidity is likely to remain plentiful, which should cushion any sell-off in some asset classes and could even pump up new bubbles in others (equities?). And, turning to monetary policy, central banks need to find new approaches to deal with the liquidity monster. An old-fashioned concept like inflation targeting is certainly not the answer, in my view — in fact, it may be part of the problem."
"According to our calculations, global excess liquidity has been on a steep upward trend since about 1995. Between 1995 and 2005, the credit-to-GDP ratio has risen by 25%, broad money-to-GDP by 32%, and narrow money to GDP by no less than 55%. The steep rise especially in narrow money reflects the fact that this aggregate is particularly sensitive to short-term interest rates, which were reduced sharply following the bursting of the equity bubble in 2000. Thus, monetary easing has produced an unprecedented amount of liquidity not needed to finance transactions in the real economy and available to chase bond, equity and other asset prices higher."
"Against this backdrop, it strikes me that the concept of ‘inflation-targeting’, as it is commonly understood, is wholly inadequate to deal with the excess liquidity issue. Many central banks who have applied the concept directly or indirectly in the past are becoming increasingly aware of the limits of this approach. It is a great concept if you want to acquire credibility and want to bring about disinflation. But, once inflation is low and stable, credibility may become a curse as it encourages excessively low interest rates and excessively high risk-taking."
"There are two possible ways out. The first is to stick to inflation targeting in principle but extend the time horizon for the inflation forecast exercise to 3 to 5 years out, and to explicitly incorporate risks to longer-term price stability emanating from asset price developments into the forecast exercise and into the monetary policy stance derived from the process. This could imply tolerating, say, an undershoot of consumer price inflation below target for some time and pursue a less expansionary policy so as to prevent a build-up of financial sector imbalances that could give rise either to higher inflation or, if bubbles burst, to deflation over the medium to longer term."
Basically I agree with Fels, and I think that if he (and I) are intelligent enough to see this, then you have to imagine that those whose job it is is to stay ahead of the curve are also up to doing it. So it isn't just 'intuiting' that they may be targeting certain asset clases, but saying that if they weren't they wouldn't be doing their job.
In this sense, as Fels concludes, central bankers may be the victims of their own success:
"But, once inflation is low and stable, credibility may become a curse as it encourages excessively low interest rates and excessively high risk-taking."