In light of the above, it's interesting that an article appeared in the Wall Street journal this AM by Fed watcher Greg Ip. He's basically saying that the Fed, no matter what the data suggests, is almost certainly not going to reverse course from their tightening strategy for the rest of the year. That is, their chosen path toward neutrality is a foregone conclusion. If you aren't aware, Greg Ip is one of the "chosen ones" in terms of Fed leaks. When a column by Mr. Ip appears, it is widely understood that he is speaking for the Fed given his contacts there. So it's doubly interesting that this "we're not changing our tightening policy" column appears on the morning of a much weaker than expected employment report.
There are a few things to note about this confluence of events.
First, the Fed has a long and awful history of changing their policy directive in very short order. To wit:
1997-7/1/98: Dedicated tightening bias.
09/29/1998: Surprise 25 bps easing and another 25 bps inter-meeting easing in October
11/15/2000: Dedicated tightening bias with inflation fears.
01/03/2000: 50 bps easing done on a surprise inter-meeting basis
And the most recent policy actions only reinforce this vacillation.
Q4:03: Policy to remain accommodative for "considerable period".
1/28/2004: Factors "balanced", removal of easing bias
Q1:04: They could be "patient" in raising rates
August 2004: will raise rates at each of the next three meetings.
So in the span of the last 6 months the Fed has gone from a "considerable period" of accommodation to "patience" in raising rates to now, according to Greg Ip's (read: the Fed's) WSJ column, a dedicated tightening bias to achieve policy neutrality.
It doesn't matter what the factors are that have gone into these decisions or the length of time the Fed is looking into the future to limn the expected inflation rate. The fact is, these flip-flops strongly reinforce the idea that the Fed really has no better idea about what interest rates "should" be than you or I. But because their decisions impact the time preference (spend now or save later) of certain economic actors, their guessing and flip-flopping have far greater costs (and major unintended consequences) than you and I debating about what an accommodative, neutral, or tightening policy is over beers (which I look forward to doing in Crested Butte by the way).
What is most alarming about all of this is the following set of conditions:
(1) the Fed is dedicated to tightening policy and removing liquidity
(2) Asset markets across the globe have uniformly started to deteriorate since Q1:04
(3) The economy's "soft patch", if the unemployment numbers of the last few months are to be believed, has turned into something quite a bit more dire
Are those the conditions that are going to lead to a continuation of the liquidity-inspired economic "boom" that started in Q4:2001? And doesn't this strike you as a particularly schizophrenic Federal Reserve?
Honestly, time to get the keys to the candy store back from these folks.
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