Fed Policy: An Eye to the Future

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Following the Fed’s March 18 announcement of more aggressive policy action, the dollar fell and commodity prices rose. Indeed, cries went up almost immediately that the Fed’s actions will boost inflation in the years ahead. Are such fears warranted?

...

Bernanke is confident that the Fed will be able to unwind its accommodation without allowing inflation to increase. Still, finding the right balance between promoting economic recovery and thwarting inflation will be difficult. Studies show that recessions caused by financial crises tend to be more severe and longer lasting – and a very common mistake is to take the policy punchbowl away too early.

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Fed officials are not just blindly boosting the money supply. Great consideration is being taken in how monetary policy accommodation will eventually be removed. Fed communications will play a major role in this process. One thing that the Fed can do is to conduct regular press conferences, which will help make its intentions clear and dispel popular misconceptions.

Comments

[gabe borens...:]

Inflation should be the least of the FED's concerns at this time.The savings and the liquidity of the average onsumer have been decimated.The threat of the demand pull inflation that had followed the past cyclical recoveries is almost non existant.The broad application of liqiudity into the key sectors will result in an impressive non inflationary GDP expansion by the fourth qtr.

Apr 23 11:54 AM

[whidbey:]

Is this tongue in cheek?

The problem for today is deflation - worldwide.

The willingness of Congress to allow the Fed to withdraw its net additions probably will not exist, so it will not happen on time, if ever. Congress will never tolerate competitive interest rates again if it can avoid doing so.

Secondly we have no idea what the future will hold, but we do know this: Fed assurances of its actions are premature since we have little insight into what the rest of the world will be doing in future. Is this post serious???

Apr 23 01:13 PM

[conceptwizard:]

Canada locked in its rate at .25% for a 14 month period, after dropping it .25% I would agree that delation is the issue at hand for the next 12 months minimum.

Inflation will be harder to control later by sopping up cash if the National debt holders start liquidating their positions as well. This could be a tricky high wire act.

Apr 23 03:03 PM

[SW Richmond:]

The way the Fed can slow down the economy is by selling securities and sucking up "money". With the Fed and Treasury together furnishing lending, spending or guarantees totaling the U.S. GDP, who is left to buy securities from the Fed? What private capital will want to buy the junk MBS that constitute the Fed's balance sheet now that it has swapped away most of its Treasuries at the TSLF and has promised to monetize $850 Billion more? Who especially will want to buy junk MBS in an environment of Fed tightening which is certain to destroy the value of those very same MBS?

The notion is positively laughable. The Fed is in a trap of its own construction. The Fed and CONgress will need to conjure some means to foist it onto the backs of the taxpayers. Count on it.

Apr 23 06:32 PM