Fed's Rate Policy Makes Some Economists Uneasy (but higher is disaster)

[papau]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=a2r86ECqwhm8


Fed's Rate Policy Makes Some Economists Uneasy: John M. Berry


March 10 (Bloomberg) -- .....Of course, the Fed eventually will begin to raise rates. Everyone should hope so, because otherwise it would mean U.S. labor markets remained unacceptably weak. <snip>


In an ``open letter'' to Fed Chairman Alan Greenspan last month, Roach (Morgan Stanley) urged him to immediately raise the overnight target to 3 percent ``to restore some semblance of normalcy to financial markets. Here we are, only four years after the bursting of the first bubble, and the risks of new bubbles abound.'' <snip>

Ethan S. Harris, chief economist for Lehman Brothers, ran the proposal through the Washington University Macro Model to see the impact of an immediate 200 basis point increase in the overnight lending rate."Simulated growth tumbles from our assumed 4 percent baseline to 2 percent," Harris said.... "The unemployment rate stops inching down toward 5 percent and begins to climb above 6 percent. Inflation resumes its downward path, with core CPI inflation reach about 0.5 percent in 2005....Given this projection, the stock market would correct and any hope of a cyclical recovery in the budget deficit would end," ...<snip>


However, the survey of business establishments is much more sophisticated statistically than it was a decade ago, and it appears to be tracking actual payroll changes pretty well (this is a jobless recovery).


Prices of many commodities rose strongly in 1993 while the Fed held its overnight rate target steady at 3 percent, and they continued to rise in 1994 after the Fed began to lift the target...None of the commodity price surge showed up in core consumer prices. The year-over-year change in the CPI less food and energy prices, which was 3.2 percent in December 1993, had dropped to 2.6 percent by the end of 1994.

[Sagan]

1. Fat chance

Greenspan has shown that he cannot and will not do anything that might imperil Chimpy's election chances.

[papau]

2. True

:-)

[orwell]

3. Shockwave

The Fed is dying for some inflation. Their real fear is asset deflation while debt loads remain at historic highs. (Can you spell implosion...see Japan)

The Fed could care less about slack employment. They are concerned about systemic shocks.

O