September 17, 2003


Fed reaffirms commitment to low rates (Alan Beattie, September 16 2003, Financial Times)

In a statement released with the decision, the Fed said that rates would remain low "for a considerable period". The statement was almost identical to that issued in August, saying that the risk that inflation would fall further outweighed the risk it would rise. But it was slightly more pessimistic about the labour market, saying it was weakening rather than that indicators were mixed.

The use of almost identical wording suggests that the Fed's review of its communications policy, which followed turbulence in the financial markets after the June meeting, has yet to feed into FOMC decisions.

Stocks rose immediately after the announcement, probably reflecting relief that the Fed had maintained its commitment to keep rates low.

In the run-up to the meeting, investors had priced in a chance of less than 5 per cent that the Fed would raise rates rather than leaving them on hold, following clear signals from Fed officials.

The Fed has consistently argued that while the US economic recovery is gathering strength, there is as yet scant evidence that this is translating into higher inflationary pressure.

With most estimates showing a substantial degree of slack in the US economy, companies have continued to struggle to make price rises stick. "Business pricing power and increases in core consumer prices remain muted," the Fed's statement said yesterday.

The lack of pricing power was underlined on Tuesday by the release of figures showing that underlying inflation had fallen to its lowest level in nearly 40 years. The consumer price index excluding food and energy rose just 1.3 per cent in the 12 months to August, its lowest rate since 1966.

The failure, in the 90's, to recognize that a globalized/technologized economy would create significant deflationary pressures continues to haunt the Fed. The failure to cut rates suggests they haven't totally learned the lesson.

Posted by Orrin Judd at September 17, 2003 7:51 AM

Iit seems that Greenspan was going to see the "irrational exuberance" through to the end before really acting (except for the Asian collapse adjustments). Now he is stuck with a deflation rock on one side and the spectre of easy money on the other. What will he (or his successor) do with the punchbowl in 2005, particularly if commodity prices (i.e., gold) continue to climb?

And just what rate-cutting failure is being referred to? Is 1% not low enough?

Posted by: jim hamlen at September 17, 2003 2:44 PM


Yes--they should be 0% or lower and should have been by mid-2000

Posted by: oj at September 17, 2003 3:17 PM


Careful. We've got a growing deficit to finance. But we still need foreign investors to be interested enough in newly minted US debt to cart off truckloads of the stuff. If yields follow the Fed lower it starts to look pretty uninteresting compared to other markets - especially since the 30yr stuff is off the table. So far, despite much hand wringing to the contrary, recent Treasury auctions of mid-term paper have managed to keep folks interested.
" The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

Posted by: John Resnick at September 17, 2003 3:38 PM

John --

One of the interesting but little noted stories of the last ten years is the decoupling of Fed rates from other rates.

Posted by: David Cohen at September 17, 2003 6:02 PM


I will cheerfully admit to knowing very little about the ins and outs of economics and high finance, but I also admit to not being able to see how banks are going to be able to make money from mortgages and other such loans if the interest rate (which, presumably, represents their profits) is hovering at 0%. But then, I'm an economic simpleton.

Posted by: Joe at September 17, 2003 6:32 PM


Generally true, yes. But the correlation phenom is untested below 1% without 30-yr paper on hand and Mr. Greenspan is not much of a gambler.

Posted by: John Resnick at September 17, 2003 6:33 PM


I'm an economic imbecile too, but I think the following is accurate.

If there's inflation and I lend you a dollar to be paid back in ten years, you have to pay back more than a dollar because dollars are worth less by then. In a deflationary situation the dollar you borrow today actually buys more when you return it in ten years than it did today. I've made money by lending at no interest.

Japan recently had negative rates--for example, if I lent you $1.10 today, you'd pay me back $1 in ten years.

Posted by: OJ at September 17, 2003 6:41 PM

OJ: Surely you're not advocating a deflationary policy? That this modest and methodical recovery appears to be on the back of efficiency rather than unessential labor is already a tough pill for many to swallow. Tell widget makers they'll all be charging LESS for their gizmos, meaning even less earnings outlook going forward, and you'll really have a mess on your hands.

Posted by: John Resnick at September 17, 2003 7:25 PM


Quite the opposite. I'm saying interest rates are too high given that we have deflation. I want Weimar era hyper-inflation, so the Wife and I can pay the !1 million we owe with a wheelbarrow full of useless Dead Presidents.

Posted by: OJ at September 17, 2003 7:38 PM