Dollars and Jens
Friday, December 07, 2007
fed policy (Dean rambling)
Well, that sure was a number, wasn't it? I haven't actually looked at the report, but the second-hand sources certainly make me skeptical of the idea that the Fed should cut rates 50bp next week.
Treasuries sold off yesterday and today, but longer-term treasury rates are still about 25 to 30 bp lower than they were at the end of October, and I think a 25bp cut can be justified as simply keeping policy from tightening up; lower long-term rates, particularly of the safest instruments, represent to me some combination of low inflation expectations, weak confidence about the economy, and a propensity to save, all of which make me think the equilibrium short-term rate would come down, too, and that 4.5% would represent tighter policy now than it did six weeks ago. (I don't mean to suggest that a "neutral" interest rate can be gauged to within 25bp, but the change in it can be over short periods of time, and I think may be dropping a bit faster than long-term rates.) In fact, I'd think I'd be tempted, were I the FOMC, to say, "Okay, New York, until future instruction just try to keep the funds rate about 20 bp above the ten-year treasury yield." I'm weird like that, though.
There's some call for actually loosening monetary policy, and initial claims for unemployment have inched up to their highest level since the immediate aftermath of Katrina, but the unemployment rate hasn't changed appreciably since July, and income and spending never seem to be quite as dismal as we keep expecting. On an anecdotal level, a company with which I have a credit card recently sent me an unsolicited offer for an unsecured term loan at 6.99% APR, which makes me think the credit crisis is at least less nuts than it might be.
The tricky think about monetary policy is that it operates with such long lags; the fear is that, if we wait until we actually see deterioration before we initiate stimulative monetary policy, it will be too late by the time we do; on the other hand some of the fallout from the housing bubble has been awaited for 18 months or longer, and never quite seems to show itself. Paranoia of this kind can be inflationary when it affects monetary policy.