Tuesday, September 29, 2009

Fed Is Back to Threatening with Rate Hike

On Friday last week, a Fed Board member Kevin Warsh wrote a please-read-carefully-between-the-lines-and-between-the-words Op-Ed piece on Wall Street Journal.

Today, Federal Reserve Dallas president Richard Fisher spoke in a plainer English.

Official: Fed will need to boost rates quickly
(9/29/09, AP via Yahoo Finance)

"WASHINGTON (AP) -- To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the U.S. economy is back on firmer footing, a Fed official warned Tuesday.

""I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity" to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

"Although Fisher has a reputation for being one of the Fed's toughest inflation fighters, it marked the second such warning by a central bank official in recent days. Fed member Kevin Warsh on Friday said the central bank will need to move swiftly when the time comes to raise rates.

"It's all part of a high-wire act that the Fed has to perform as the economy transitions from recession to recovery."

I guess you could say that. You could also say that the Fed is empowered to make or break the economy. As you see in this comment in the article from a monetary policy expert at University of California Santa Cruz (I didn't even know they have the economics department):

"When the decision is made to boost rates, they will need to be "increased aggressively," argued Carl Walsh, a professor of economics at the University of California, Santa Cruz, and an expert on monetary policy. "Committing to a gradual increase in the policy rate is not justified."" [emphasis is mine]

Not justified?? And "aggressive increase" is justified, then? Why? By who (or what)? The expert continues:

"Consumers, businesses and investors must feel more confident that prices won't spiral higher in the future, so their inflation expectations don't become "unanchored," Walsh said last month."

Is this based on any kind of historical observations, or is it solely his conviction of how consumers, businesses and investor should feel when they see the interest rate being jacked up suddenly and aggressively?

I have this nagging feeling that it's the latter, because it is consistent with other policies having been floated, particularly since the current administration took over. Key word is "should". Policy decisions are to be made on how things "should be", as perceived and determined by the policy makers, whether they are legislators or industry lobbyists or administration officials or the Fed officials. It is normative, as opposed to positive.

It is not new; an unnamed aide to the previous administration said they were not working in the reality-based community. It's just that the current government has turned up the heat on the proverbial pot very aggressively and rapidly. They are not slow-boiling the proverbial frog anymore, and the frog now knows something bad is up and getting rapidly uncomfortable.

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