Dollars and Jens
Thursday, July 17, 2008
An interview with William Poole.
When William Poole warned in 2003 that Fannie Mae and Freddie Mac lacked the capital to weather a financial storm, his advice went unheeded. Five years later, the outspoken former president of the Federal Reserve Bank of St. Louis is far too polite to say “I told you so,” but he does have a message for the Fed: Wait too long to tackle inflation, and you’ll face an even worse recession in the years to come.I felt they cut the funds rate too far in March, and that they should have bumped it up since then, not because I think the economy is strong, but because I feel the economy doesn't benefit from the last 50 to 100 bp of cut. Note that, insofar as some of the current pain is a function of high oil prices, that it's a function of the weak dollar:
Now, to me, the inflation problem is actually part of what is depressing economic activity, because the generalized inflation that I think we have underway — although it’s not showing up in core inflation and wages just yet — is showing up in the depreciating dollar, and the depreciating dollar directly feeds through to increased energy prices and food prices. So, the depreciation itself is leading to depressed economic activity.In any case, the economy just has some shaking out to do, and creating inflation on top of our current problems isn't going to do anybody any favors.
Bernanke, with his background, is worried about financial disintermediation, and I can see where this would lead him to try perhaps a little too hard to keep the collapse of Bear Stearns and the GSEs "orderly" and monetary policy loose. Certainly as big financial companies collapse your traditional monetary aggregates become harder to use as indicators of how tight monetary policy actually is; as long as you're targeting the fed funds rate, though, I don't currently see a reason to target it this low at this time.