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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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March 07, 2011


One chasm that really isn't one

Floyd Norris, writing last Friday in the The New York Times, fretted about "The Chasm Between Consumers and the Fed." We here at the Atlanta Fed share some of that concern, and indeed the Times article quotes from a speech by our president Dennis Lockhart on just that subject from last month. But then Norris takes a turn I didn't expect. Norris's Times article includes the following chart…


…and the article proceeds:

"The Fed's goal is to keep the inflation rate at or near 2 percent, and it does not expect a significant increase for at least a few years. … The stock market is generally thought to do better when inflation is falling, but Martin Fridson, the global credit strategist for BNP Paribas Investment Partners, points out that is not always the case. There is, he says, a time when inflation is too low.

"The accompanying chart, based on a report by Mr. Fridson, shows that from the 1940s through the 1990s, there generally was a relationship. The more inflation declined in a decade from inflation in the previous decade, the better the stock market did.

"But in two decades, the 1930s and the first decade of this century, inflation fell from already low levels and the stock market suffered. 'Below a certain level of inflation,' Mr. Fridson said, 'a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.'

"If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke 'fails in his stated goal of holding inflation to 2 percent or less.' "

It was all good, up to that last paragraph. As President Lockhart reiterated in a speech today (emphasis added):

"I'll explain the technical rationale of my Reserve Bank in supporting the scope of LSAP2 [the second round of large-scale asset purchases] last November.

"Through the summer and into the fall of last year, our internal forecasts at the Atlanta Fed were calling into question whether the policy stance at the time assured progress toward the committee's growth and price stability objectives. In more normal times, these circumstances would have prompted a cut in the FOMC's [Federal Open Market Committee] target for the federal funds rate. This approach would be (would have been) the prescription of the so-called Taylor rule which relates policy rate moves to forecast 'misses' on the Fed's sustainable growth and stable inflation objectives."

As we've argued in macroblog before, keeping inflation from falling below that "certain level of inflation" reflecting "economic weakness more than it reflects a salutary reining in of excessive monetary creation" was exactly what President Lockhart has offered in defense of implementing LSAP2, and in support of claims to its success.

There remain plenty of policy questions on which intelligent well-intentioned folk can disagree, but on the assertion that it is wise to guard against too much disinflation, we are in agreement. No need to find disagreements that aren't really there.


Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed


March 7, 2011 in Deflation, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink

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Comments

David, your colleagues' assertion that "wrongful foreclosures can only happen if the borrower is delinquent" is simply mendacious. Wrongful foreclosures happen to millions of Americans every year. Here's how it happens:

ONE
The institution that forecloses doesn't actually own the paper. They submit a robosigned or otherwise fraudulent set of documents to cover for the fact that they are not actually holders of the debt they claim to have. That is, the bank foreclosed but legally the American in question doesn't owe them the money.

TWO
The institution that forecloses caused the foreclosure through its own wrongful acts. They force-placed insurance on a house that had insurance (or an available policy which they failed to pay from escrow, thereby causing the cancellation) and that began the spiral. They placed a payment off by a couple of cents into a suspense account, refused further payments and foreclosed. They told homeowners to stop paying to qualify for a modification but never intended to actually provide one, or the owner didn't qualify. They were offering a modification but "lost" documents repeatedly and then foreclosed. Or anyone of a number of other wrongful acts - all of their hand, not the homeowners.


This is egregious. Do something about it.

Posted by: Unsympathetic | March 11, 2011 at 04:27 PM

As a non-economist I hate to be the one to point this out, but the stock market isn't the economy. Remind me again why I should be concerned about a casino?

Posted by: cahuenga | March 13, 2011 at 07:55 AM

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