Thursday, November 20, 2008
The Federal Open Market Committee announced earlier today that they are extending their December 15th meeting for another day "to allow additional time for discussion" on the many ills of the American economy and its sickly financial markets.
This comes after Wednesday's release of the minutes from the last two-day FOMC meeting on October 28th and 29th where projected economic growth was lowered dramatically and the forecast for 2009 unemployment was ratcheted upward, from 7.1 percent to 7.6 percent.
Will another day make any difference?
Maybe they shouldn't meet at all.
Jim Rogers may have had it right when asked some time ago what he would do if he ran the Fed. The famed investor replied, "I'd abolish the Federal Reserve and go home".
On a related note, Fed Vice Chairman Donald Kohn gave a speech the other day in which he stuck to his guns regarding asset bubbles. It's pretty much the same story - can't see 'em, can't be sure that we can stop 'em, and can't be sure that it would do any good if we did.
In short, we still do not fully know what caused the run-up in house prices and over-building. Short-term rates were low in 2002-04 as the Federal Reserve countered the risks it saw to good economic performance, and these low rates probably had some effect on housing markets at the time. But the problems largely built up after policy rates were well on their way to neutral, and other factors appear to have played major roles.He then goes on to note that the Fed needs to understand financial markets better and do a better job of regulation.
In sum, I am not convinced that the events of the past few years and the current crisis demonstrate that central banks should switch to trying to check speculative activity through tighter monetary policy whenever they perceive a bubble forming. The recent experience may have made us a bit more confident about detecting bubbles, but it has not resolved the problem of doing so in a timely manner. Nor has it shown that small-to-modest policy actions will reliably and materially damp speculation. For these reasons, the case for extra action still remains questionable, despite our having learned that the aftermath of a bubble can be far more painful than we imagined.
This cartoon from the Telegraph comes to mind: