The Fed Should Hold Firm (On Federal Funds Rare Cut)

Wall Street Journal ^ | 15 May 2007 | ALLAN H. MELTZER

[shrinkermd]

Less than 25 years ago, the Federal Reserve ended the Great Inflation that plagued the 1970s and early 1980s. Harvard's Martin Feldstein (on this page) and other economists are now urging the Fed to repeat past mistakes because they believe a loose monetary policy is necessary to head off an economic downturn they see coming our way

...The Federal Reserve staff also produced inflation forecasts that systematically underestimated inflation year after year. Economists' forecasts may be better than others, but they are not very good.

...With annual inflation at 2% or more and unit labor costs rising at a 5% rate, loose fed policy risks reviving the latent fears that it is willing to permit higher inflation now to respond to a forecast that unemployment may rise. That returns to the policy that made the Great Inflation costly and durable.

The better policy is to wait until the very mixed data of the moment forms a pattern. High-frequency data is often revised. It often has transitory aberrations that do not persist. Unfortunately, after a major change in underlying conditions, we know even less than usual about the future.

Good monetary policy makers should be watchful but would wait for better indications of the future. Leave the federal funds rate alone for the present, but show concern and give equal weight to avoiding higher inflation and recession. Don't be afraid to disappoint the market.

[shrinkermd]

Mr. Meltzer is a professor of political economy at Carnegie Mellon and a visiting scholar at the American Enterprise Institute.

[Mariner]

Strange, another PhD that agrees with me:)

[shrinkermd]

“Rare Cut” in the title should be “Rate Cut.” Sorry.

[ex-Texan]

Greenspan Thinks Rates Need to Go to Double Digits

http://www.freerepublic.com/focus/f-news/1896538/posts?page=40#40

[Always Right]

Strange, another PhD that agrees with me:)

Nothing I would ever brag about.

[Moonman62]

All these PhD’s who want a hardass monetary policy work at places that never do layoffs.

[Moonman62]

Less than 25 years ago, the Federal Reserve ended the Great Inflation that plagued the 1970s and early 1980s.

Ronald Reagan ended stagflation. All the Fed did was create the worst recession since the Great Depression. All the Fed does is create recessions and inflation.

[1066AD]

Wouldn’t a Fed cut play havoc with foreign currency exchange rates as it would make the difference between the dollar and the Euro rates, or sterling rates, even greater ?

[finnman69]

I hope the rate cuts are “RARE”

[texastoo]

Read post #4. Interest rates double digits. Greenspan again.

I can’t stay with this thread tonight.

[palmer]

Greenspan Thinks Rates Need to Go to Double Digits

What he really means is we can go to double digits now and get it over with, or we can have a ton of inflation, then go to double digits after most savings and productive investment are wiped out. Bernanke will choose the "later" option.

[nicmarlo]

ugh.

[jiggyboy]

He’ll cut rates on Tuesday. Wall Street big shots have pretty much promised a monstrous sell-off if he doesn’t cut rates, and have pretty much announced that a recession can be avoided only by an immediate rate cut. The FOMC always does what Wall Street wants and what takes the least amount of spine, and doesn’t want to be blamed for that recession.

[familyop]

"Harvard's Martin Feldstein (on this page) and other economists are now urging the Fed to repeat past mistakes..."

The mistake of the '70s was raising the rate. Lower the rate. Adjust the dollar down for the international markets. It's better than instigating more protectionism with a continued high dollar.