Thursday, June 26, 2008

Does the Fed's dual objective breed duplicity?

This past week BOE head, Mervyn King, said something that the Fed Chairman would never say. He said that to control inflation growth was going to have to slow down. Since Barney Frank has pushed this real-time view of the dual objective onto the Fed, the Fed has lost the ability to be candid with us over such matters.

Wishful forecasting? Honest assessments?
This raises the question of whether the Fed is currently 'telling us the truth.' It seems a bit odd that the Fed at its meeting this month warned of (1) risk with inflation and inflation expectations, (2) talked of a firming in domestic spending, (3) gave up its forecast of oil prices flattening or declining, but (4) held to the view that inflation would drop in the period ahead. How is all that going to happen? What makes it happen?

A new way to look at the Fed?
If there is a risk in crimping the Fed's autonomy this way- and that is exactly How I look at Barney Frank's behavior - it is that it will force the Fed to move even farther from the path of transparency to the dark world of duplicity. The Fed will have to tell us the way it needs things to be in order for it to run the policy that is correct for the times. This may mean that it will have to mis-characterize the economy from time to time.

Is the Fed really out on a limb?
I know that some looked for the Fed to hike rates at its last meeting. Still I am surprised since the economy has been spinning off so many weak signals. It hardly seems able to take much in the way of rate hikes. I think of lot of this controversy depends on whether headline or core inflation is the right series to watch - a matter of no small controversy.

Fed Skeptic
I remain skeptical of the Fed's characterization of the economy in the face of such weak consumer confidence and amid such poor signs that tax rebates are spurring anything. Labor market signals are deteriorating and the stock market has been giving up ground fast. In short very little in the economy is acting as though the Fed is right. Those who side with the Fed do so not because of conviction over growth but over fear of inflation mostly headline inflation. Is it worth that level of importance? Headline inflation has not been at the center of the Fed's target and, as I keep saying, the higher that oil prices go, the lower they are going to become since high prices will collapse the US and other economies and take future oil prices down along with them. Oil prices have gone to or past the tipping point. The economy is what's at risk not inflation. But the Fed does not seem to see it that way or at least does not admit so.

1 comment:


Another eye opening post on the fed.