Blogger's Take: FOMC Minutes

Wednesday, November 15, 2006 | 07:00 PM

Yet another edition of our new feature: Blogger's Take.

FED OFFICIALS REASONED last month that risks to both economic growth and inflation had diminished slightly, but higher inflation "remained of greatest concern," according to FOMC minutes.

The question at hand: What should the Fed be focused on:  Inflation? Slowing Growth? Neither?

Inflation or growth? What matters more to the Fed, better yet which one should matter more? I’ll pick inflation over growth.

My thinking is that recessions are a normal part of the economic cycle. Inflation that is allowed to get out of hand can be ruinous to a country; a normal recession is not ruinous. We see a lot of folks preoccupied with hard landing or not. What is normal is a recession followed by an expansion followed by a recession. Market declines go hand in hand with recessions (actually, they lead by a few months but you get the idea). This process has not been repealed regardless of anyone’s ability to time such things. There are many instances in history where the US stock market has declined by 30% and then it comes back or as is the case now, is coming back from about a 50% hit for the S&P 500. Again perhaps this can be timed or not but this is how it works.

What is not normal is very high inflation. Staving off the consequences of something that is not normal but in fact more damaging makes more sense to me.

-Roger Nusbaum,
Random Roger's Big Picture

* * *

What the Fed should focus on it is pretty clear

1) Plunging PPI, plunging copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging consumer credit. Those items along with the $CRB and oil were the focus of discussion in The PPI, Gold, and Dr. Copper

2) Decreasing credit spreads, insatiable appetite for risk, mergers, IPOs, corporations going into debt just to buy back shares, etc, all of which are fueling a strong stock market even as insiders are bailing hand over fist. In other words the ability to get credit is still far too easy.

Eventually credit spreads will start to widen on their own accord just as housing itself died of simple exhaustion not a massive spike in long term interest rates as everyone expected. In the meantime the risk is corporations will blow all their cash through silly buybacks at a time when they will need the money to weather the next storm (the consumer led recession of 2007).

Unfortunately for the Fed there is no real solution. In fact a credit purge is badly needed and long overdue, so the best thing for them to do is to let the market attempt to resolve the issues instead of fighting it. After all, it was the last refusal to let the markets sort it out that created the housing/debt bubbles. Nonetheless, I suspect the Fed will fight the next downturn and if so gold should soar.

Hmmmm. I suppose the REAL bottom line then is that the Fed should not focus on a single thing but rather focus their efforts on dissolving themselves and letting the market set interest rates rather than micromanaging them to death.

-Mike Shedlock / Mish
Mish's Global Economic Analysis

* * *

The Fed? Do they even matter anymore?  Didn't Hank Paulson at Treasury grab hold of the steering wheel a couple months back and relegate Fed Chief Ben Bernanke to the back seat with one of those Playskool steering wheels?

-Tim Iocano
The Mess That Greenspan Made

* * *

The universal challenge for policy makers is to deal with the reality in front of them. As opposed to other policy makers, the Fed is able to measure their progress against market-based measures. One need only look at the recent history of market-based inflation expectations to see that the Fed has done a decent job on this important goal.
Ten-year inflation expectations, as measured by the spread between the 10-year constant maturity treasury and the 10-year constant maturity TIPS (via the St. Louis Fed), show the most recent level at 2.32%. This is nearly equal to the 2.34% average seen since the beginning of 2003. At least by this measure, the Fed has not allowed inflation expectations to run away from them.
This measure is by no means perfect. In addition it would be interesting to see how the Fed is doing by the measure in comparison to other developed markets. Until somebody comes up with a better real-time measure for economic growth, we think it best the Fed focus on inflation and inflation expectations. The temptation to try and micromanage the economy is too big to allow policymakers to swing wildly between two (oftentimes) competing goals.

Wednesday, November 15, 2006 | 07:00 PM | Permalink | Comments (1) | TrackBack (0)
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"Plunging PPI, plunging copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging consumer credit"

I wouldn't call $ 3.10 per lb of copper "plunging". The eventual price will likely be $ 1.40, where it was a year ago before the cartel pumped the futures price.

A very interesting group of parameters. Each one pumped up by a Fed gone berserk (greenspeweth).

Posted by: blam | Nov 15, 2006 8:49:27 PM

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