The Fed is Short-Term Rational, But Not Long-Term Rational
Keynes said, “In the long run, we are all dead.” Now, those of of us who believe in Jesus Christ would object, but that’s not my purpose for writing here. At present, the FOMC is pursuing a short-term strategy to reliquefy the short-term markets through the TAF and other means, leaving the long-term inflationary results to play out as they will. As they do this, they listen to the strains from banks and other lenders and ignore the price signals from food and energy, which are in greater demand globally.
Long-term rationality would have the Fed stop about now, because the present yield curve is adequate to stimulate the economy. I argued that at RealMoney, when the Fed started raising rates above 3%. Overshooting would lead to bad results. The same is true here on the flip-side. Lowering rates by too much will create its own troubles,
The Fed likes to talk about its “independence,” but really it has little, unless it is willing to make some politically unpopular moves, and not lower rates much further.
I’ll tell you what I expect: the FOMC will lower the Fed funds rate by 50-75 basis points at the meeting on 3/18. They follow the market; they don’t lead it. Even though loosening does little good for dodgy financial companies, they loosen in hope that they might end the leverage crisis.
