Friday, June 26, 2009

Fed Can't Have It Both Ways

The Fed just completed their recent meeting with a statement that they are seeing signs of the economy improving, and are going to leave overnight rates at 0%-0.25% for the indefinite future. On one hand they are saying the economy is improving. On the other hand they are saying the economy is crap because they need to keep rates at historic lows for an extended period of time. Many people do not understand how fiscal policy works, but the Fed. should. When the Fed. adjusts their rates there is a 9-12 month lag before the rate change takes full effect in the economy. Because of this huge lag, the Fed. needs to stay ahead of the curve, and try to anticipate where the economy will be in a year. Keeping rates too low in a recovering economy leads to inflation, and was a big cause of the current financial crisis. Had the Fed. kept rates higher prior to 2008, it would have helped to prevent, and/or deflate the housing bubble. It would have been harder for people to qualify for even the sub-prime type loans if rates were higher, and if less sub-prime loans were made, the housing bubble would have been less severe. The Fed. was essentially enabling the housing bubble through fiscal policy. If the Fed. really thought the economy would be recovering in the next 12 months, they would need to start moving rates up now. How about just moving the rate to 0.25%, instead of a range that includes borrowing money for free? The fact is that there are no green shoots, and the Fed. is well aware that Obama's policies, if enacted, will crush the economy for many years to come. They want to be a team player so they are talking the economy up, but their interest rate policy speaks for itself. Holding rates at historic lows for an indefinite amount of time, means that in their opinion, the economy will not be improving for an indefinite amount of time plus 9 to 12 months.

Labels: , ,


Post a Comment

<< Home