Fed's Passive-Aggressive Tendencies

By Brad Zigler

Fed watchers normally have to resort to teas leaves and chicken entrails to parse the pronouncements of the Federal Reserve Board, but this month the language of the Federal Open Market Committee was fairly straightforward.

The just-released August 5 meeting minutes showed Fed policy makers' concern about weakening economic conditions outweighing those of incipient inflation. Thus, the FOMC ended the meeting by holding the benchmark federal funds rate unchanged at 2%, a level reached in April when a six-month campaign of rate cuts was halted.

The vote to hold rates steady was rather lopsided at 10-1, with gadfly Dallas Fed President Richard Fisher holding out as the lone dissenter. Fisher wants to raise rates now to check inflation.

The Fed, though, is allowing the marketplace to do the heavy lifting for now. While committee members agreed the next move would likely be a rate hike, most didn't view the Fed's current monetary stance as "particularly accommodative." Tighter credit policies and higher borrowing costs are already dampening money growth, says the Fed.

The FOMC acknowledged that "measures of core inflation might well edge up later this year, given the pass-through to final goods prices of earlier increases," but elaborated by saying committee members expect core inflation to edge back down in 2009.

Some moderation, in fact, has already occurred. It's of the monetary type, though, signaled by the real-time measure we proposed in our recent article, "Computing Inflation In Real Time." This indicator measures the relative value of the dollar against a monetary constant, gold. The Fed's abandonment of its dollar-cheapening policy has reduced monetary inflation by 7.6% over the past year.

 

Real-Time Monetary Inflation Rate (August 2007 - August 2008)

 

The Fed's hands-off policy is a bit of gamesmanship. With rates at 2%, there's certainly more room for upside moves than for rate cuts, but the longer the Fed waits, the more it allows the deterioration of competing currencies, mainly the euro, to bolster the greenback.

Sort of passive-aggressive, that.

Comments

[whidbey:]

What you did not say is that changes in the Euro which affect dollar/euro trade are not really effective as policy for the internal economy of the US. The problems of the interest rates v. inflation are to be managed with an economic slow down, you know food, energy and medical care. Keep hoping for the magic fix to arrive and avoid proactive policy, that is the game. Of course it that does not work, we have our choice of inflation (more) and economic slow down (more). I think is what is keeping everything on hold: they don't like the risk/reward ratio.

2008 Aug 28 12:43 PM

[Nidhi Kadalbal:]

The feds are allowed to talk something and do something, to manage the crisis .. even if you call it "gamesmanship" .. :)

What are the chances that rates go up in the election year?

2008 Aug 28 12:55 PM