Seven Brief FOMC Notes

1) From an old post at RealMoney:


David Merkel
Nominate Fisher for the ‘FOMC Loose Cannon’ Award
6/1/05 4:05 PM ET

It was pretty tough to dislodge William Poole, but if anyone could win the coveted “FOMC Loose Cannon” award in a single day, it would be Richard Fisher, after suggesting that the FOMC was “clearly in the eighth inning of a tightening cycle, we’ve been doing 25 basis points per inning, it’s been very transparent, and very well projected by the Federal Open Market Committee under the leadership of Chairman Greenspan,” and, “We’re in the eighth inning. We have the ninth inning coming up at the end of June.” [quoted from the CNBC Web site] Why don’t they have media classes for rookie Fed governors and Treasury secretaries? Even if he’s got the FOMC position correct, typically the Fed governors come out with a consistent message, and then, they cloak and hedge opinions, in order not to jolt the markets.

Okay, so Fisher dissented.  So he hasn’t had a predictable tone since becoming a Fed Governor.  Big deal.  The Fed needs more disagreement, and more original thought generally, even if it is wrong original thought, just to challenge the prevailing orthodoxy, and force them to think through what are complex decisions that might have unpredictable second order effects.

2) I hate the phrase “ahead of (behind) the curve,” because there is nothing all that clear about where the curve is.

3) Watch the yield curve, and note the widening today.  That is a trend that should persist, regardless of FOMC policy.

4) Rate cutting begets more cutting, for now.  The current cuts will not solve systemic risk problems embedded in residential real estate, and CDOs, anytime soon.  They will help inflate China (via their crawling dollar peg), and healthy areas of the US economy.

5) Where is the logical bottom here?  How much below CPI inflation is the Fed willing to reduce rates before they have to stop, much less raise rates to reduce inflation?  My guess: they will err on lowering rates too far, and then will be dragged kicking and screaming to a rate rise, as inflation runs away from them.  The oversupply in residential housing will cause housing prices to lag behind the price rises in the remainder of the economy.

6) Eventually the FOMC will resist Fed funds futures, but for now, the Fed continues to obey the futures market.

7) The stock market loves FOMC cuts in the short run, but has not honored them in the intermediate-term.

1 Comment

  • Jeff says:

    Thought-provoking ideas, David.

    “Behind the curve” is the over-used phrase of the year.

    Why do you believe that the Fed does not “think through what are complex decisions that might have unpredictable second order effects?”

    If second order effects are unpredictable, what policy implication does this have?