Inflation Fears? What Inflation Fears?
Let's start with the New Yorker - perfect timing and an even more perfect accompaniment to Dallas Fedhead Fisher's thoughts on, what else, inflation before the North Dallas Chamber of Commerce today. Remember kids, Fedhead World Tour. It's not like you have anything better to watch for the autumn, do you?
[W]e’ve seen a resurgence of inflation fears even though the economy is still struggling and even though there’s no sign of price pressure either in current inflation data or in more forward-looking numbers (like the yield on the ten-year bond). A sampling of the inflation hawks’ cries can be found here, here, here, and here. A study by the New York Fed, by contrast, offers up one reason why the Fed’s pumping of money into the economy has not been inflationary: banks are holding massive excess reserves. [JDA must point out here that A) the NY Fed has its head planted directly up GS's ass and B) has a material interest in batting away even the smallest of inflation fears.]
What’s most striking about the inflation hawks’ insistence that massive inflation is on the way if the Federal Reserve does not start tightening monetary policy is that they were saying the very same thing last year. For instance, in March of 2008, Allan Meltzer, who’s been in the news of late insisting that people are overrating the seriousness of the current recession, argued that the Fed was doing “too much to prevent a possible recession and too little to prevent another round of inflation,” while in June of last year, William Poole was saying the Fed needed to move sooner rather than later in raising interest rates, lest the increases in commodity prices start creating broader inflationary expectations. That this was a complete misreading of what was happening in the real economy—where the recession was already well underway, where commodity prices peaked in July, and where overall prices were actually set to fall over the next year—has had remarkably little impact on the hawks’ conviction that inflation is just around the corner.
Also worth a look along these lines are the minutes from the Federal Reserve’s 2008 meetings, particularly those in the spring and the summer, which show that the Fed was paying as much, if not more, attention to the risk of inflation as it was to the recession; it seems pretty clear that even before September the Fed was underrating the severity of the downturn.
And while people like Meltzer were arguing that the Fed’s monetary policy was too lax in 2008, there’s a good case to be made that it was, in fact, too tight. Robert Hetzel, a senior economist at the Richmond Fed, makes that argument in this paper (pdf), showing how the Fed’s failure to cut interest rates between April and October of 2008, coupled with myriad public comments by Fed members suggesting that interest-rate hikes were in the offing, meant that monetary policy during this period was actually contractionary, precisely what you don’t want during a recession.
Speaking of inflation hawks and Fed banks that we actually like, MarketWatch sums up Fisher's performance today thusly:
A leader of a faction of Federal Reserve officials typically worried about inflation said Wednesday he did not see the tinder in the economy that could lead to an inflation fire in the near-term. In a speech, Richard Fisher, the president of the Dallas Federal Reserve Bank, said falling prices was the bigger risks because businesses are cutting prices to maintain sales volume and clear inventories. Growth should be sluggish because firms, with no pricing power, are trying to preserve profit margins by holding expenses in line. The outlook ahead looks like a "check mark," Fisher said. In other words, this is a sharp, small up-tick in growth, followed by a long period of slow growth, he said.He did say that, didn't he? The man is a poet.
Notable from his speech, this lyrical little bit:
A little over a year ago, the nation was staring straight into the jaws of economic ruin. The Federal Reserve stepped into the breach and did what central bankers are called to do: We assumed the role of lender of last resort, enacting a sequel to the playbook written by the Bank of England over 180 years ago following the Panic of 1825. We opened the flood gates and lent freely, instituting unconventional measures to keep the financial lungs of the global economy from collapsing.
In doing so, we took enormous risk with our reputation and with our balance sheet, expanding it from north of $800 billion before the crisis to $2 trillion today. We knew full well that this would lead to a gnashing of teeth about the long-term consequences of our actions, not the least of which is the potential for all the money we have pumped into the economy to spark an inflationary conflagration once its gears start to mesh again.
Economic ruin? Financial lungs? For Christ's sake, Fisher, you should have been a writer, not a central banker. If you ever want to do a guest post on JDA, give me a call and bring your bag of big sexy words with you, homeslice.
Mind you, one of my college professors was John Kenneth Galbraith, who warned his students that "the only function of economic forecasting is to make astrology look respectable." My forecast for the economy might be totally wrong. But that is how I see it as a Piscean, and I'm sticking with it.
Well alright, Fisher, what do the stars have in store for you on this fine 9/9/09?
You may be shy about your feelings today and your hesitant behavior reflects this lack of confidence. Although you might worry about being rejected or misunderstood by someone you love, remaining silent increases the chances for isolation. Take a risk and bring your suppressed emotions up to the surface where they can be the topic of discussion. Wherever the conversation leads, it will be better than no dialogue at all.
Shy about your feelings? Not quite. It appears instead that Fisher is trying to be the good little cheerleader and assuage those "unrealistic" inflation fears that have been chewing at all of us since Zimbabwe Ben started cranking up the presses.
So? Take a risk, RF and tell us what you really think. Because I don't buy a word of this.
WHO GOT TO FISHER?!?!?!