February 25, 2014
ALL OUR RECENT DOWNTURNS HAVE BEEN CAUSED BY ARTIFICIALLY HIGH RATES:
Ben Bernanke's Biggest Mistake : New documents show the Fed's critical error in focusing too much on banks rather than the real economy. (Matthew Yglesias, 2/24/14, Slate)
Oil prices aren't an inflation indicator, only wages are.Early in the year, the Fed cut interest rates aggressively to try to prevent economic growth from collapsing. Then, come summertime, the bank was paralyzed. Food and oil prices were rising sharply, pushing up overall inflation. Caught between rising inflation and a sinking economy, the Fed did nothing. Then came the Lehman Brothers bankruptcy--the largest bankruptcy in American history, and an unusually disorderly one given the unique attributes of a financial institution. The next day, the Fed's Open Market Committee had a scheduled meeting and they chose to do ... nothing.In their Sept. 16 statement, the FOMC noted that "strains in financial markets have increased significantly and labor markets have weakened further," yet they declined to return to rate-cutting.The full transcript reveals two things. One is that FOMC members were fully aware that the data unambiguously pointed in favor of a rate cut. The other is that the FOMC, somewhat bizarrely, never seriously debated the merits of cutting rates. But David Stockton, the then-head of the research department, told the assembled policymakers that aside from Lehman Brothers "the other notable development over the intermeeting period has been the weakness in the labor markets," while on the other hand, there were "reasonably encouraging signs on inflation expectations." Nathan Sheets from the international division added that the "dollar has strengthened nearly 5 percent in broad nominal terms." Brian Madigan of the monetary affairs division said financial markets were already expecting a rate cut, so standing pay would be seen as "signaling less concern about financial developments than they anticipated."In other words, inflation was down, the labor market was down, and the dollar was up. All indicators that looser money was needed. And markets were expecting looser money, so standing pat would send a bad signal.The remarkable thing is that even as the FOMC's voting members chose to do nothing, virtually none of them disputed the case for action.
Posted by Orrin Judd at February 25, 2014 6:06 PM