The Federal Open Market Committee today announced a 75 bp hike to 2.25%-2.50% in the Fed funds target. It’s solidly in line with expectations.
We can always quibble. We’d have preferred 125bp, along with a clear statement to the effect of “that’s all, folks” … “we’ll review the rate at each subsequent point and either hike, cut or hold as the data warrant at the time”. It could even ease up on the balance sheet trimming, cutting only non-Treasury securities. Of course the committee has kind of made such things difficult by conditioning the markets for years to expect only the expected. We’re still seeing excessive reliance on foolhardy forward guidance, but at least we’re also seeing concrete action, a step in the right direction.
So as a practical matter our ideal move may be a bit of a fantasy. But as long as we’re going down that road, we have to reiterate that the best rate policy is none at all. In contrast to many Fed critics, I don’t have much of a problem with QE, confined to Treasuries and gold, and would prefer to see it completely replace rate targeting as the Fed’s marquee policy tool. Probably because it’s been done so long, rate targeting has become accepted as normal, but that overlooks the incalculable damage it has inflicted on the economy.
Setting interest rates, arguably the most important prices in the world, is too big of a job for one committee of people, no matter how smart they are. History proves it, and the current economic mess adds an exclamation point. Furthermore, in news that just broke this week, the Chinese government has been attempting to infiltrate the Fed. Such things are only possible through centralized power.
A simple check on progress is provided by the stock market. The recent rally in stock prices is a canary in the inflation coal mine and if it continues poses a threat to the Fed’s inflation fighting mission. A soaring stock market will require a more aggressive Fed. We have more sophisticated tools as well; FDI shows clear progress on inflation, the Fed needs to ensure it doesn’t undo it, and all indications are that it will. Get Fed funds into line with the rest of the yield curve now and stop talking about what you’re gonna do later. That’s what future FOMC meetings are for.
There are early signs of progress on that front; in particular media speculation that the Fed may be dialing back on “forward guidance”. Such speculation often precedes actual policy developments. We have been urging this for years though … maybe the Fed is reading Finster…