Wikinvest Wire

Fed starts talking tough again

Friday, June 05, 2009

With nearly everyone now convinced that a repeat of the Great Depression is off the table, futures markets now pricing in hikes to short-term interest rates this year, fear of inflation and asset bubbles is now sweeping the land. The Federal Reserve is even starting to talk tough again, MarketWatch reporting that San Francisco Fed President Janet Yellen thinks asset bubbles might better be popped next time around.

The Federal Reserve should consider raising interest rates earlier to prevent asset bubbles from getting too big, San Francisco Federal Reserve President Janet Yellen said Friday, in a notable departure from long-term Fed consensus that monetary policy should not be used to prick asset bubbles.

Yellen said that she thinks the Fed should raise rates to lean against the expansion of a bubble in certain circumstances, especially when a credit boom is the driving factor.

"In the current episode, higher short-term interest rates probably would have restrained the demand for housing by raising mortgage interest rates, and this might have slowed the pace of house price increases," Yellen said in remarks to a central bank conference.
The former Fed chairman won't like the sound of that, particularly since it's a well established fact that it is virtually impossible to spot an asset bubble in real-time.

Surely Ms. Yellen knows that...

Witnessing the bursting of a bubble is the only sure way to know whether one existed. But, of course, by that time it's far too late to do anything about it.

It will be interesting to see how the central bank does this time if and when interest rates rise from their freakishly low levels.

Earlier in the day, this story at Reuters tells of another Federal Reserve Bank president who thinks they ought to do a better job of managing interest rates next time around.
The Federal Reserve needs to be "anticipatory" and not wait too long to tighten monetary policy, Atlanta Fed President Dennis Lockhart said in an interview published on Friday.

"We're not there yet," he told Market News International.

Lockhart said that with rising market concerns about inflation, he could envision the Fed eventually raising U.S. benchmark interest rates while continuing to run an expansionary monetary policy.
All of a sudden, the Fed meeting later this month looks like it could be an interesting one.


Anonymous said...

I think whatever happens, they're going to screw it up badly once again and just you wait to see what happens if they try to raise rates as the 2010 mid-term election gets closer.

Nick said...

I'm not sure why you postulate that virtually nobody is worried about our current recession turning into the same thing as the Great Depression. As far as I can tell, we're on course to repeat the steps which created that situation, both politically and economically. The published numbers will be somewhat different this time with the massive expansion of fiat currency and its effects, but the end result will be very similar: lots of unemployment, lots of bad government attempts to "help" the problem making things worse, lots of socialism from people taking advantage of the situation to push agendas, a long time until real recovery, etc.

The Fed's actions do look interesting, though. They might be seeing an impending threat: when people are upset after the stimulus doesn't work, they will be looking for someone to blame, and there's already a strong movement to abolish the Fed. The government could probably buy at least another year, maybe two, of socialist expansion by throwing the Fed under the bus if/when inflation ramps up, or the bond market really starts pricing it in. The Obama administration could probably even get a free pass for their first couple years of total failure economic policies by laying it all on the Fed's doorstep; if I were the Fed, I might be a tad nervous about now.

Just a thought.

Tim said...

I was being a little bit facetious in the comment "nearly everyone now convinced that a repeat of the Great Depression is off the table". That's certainly the conventional wisdom at the moment, but conventional wisdom (as we've come to learn) is often wrong.

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