Hi John,..Re:.What Bugs Me about the Fed... Is that they are using a blunt tool (hike in Fed rates....simultaneously "scaring" bonds higher)...which has a lot of negative side effects.....the Fed IS attacking prosperity..
John, I think you have misinterpreted Alan's remarks and intent. He stated more than once his intent to sustain the expansion. This, in fact, seems to be his primary concern. In his estimation, if the Fed can adjust rates to offset imbalances which threaten the expansion, then it seems to be a no-brainer.
Also, bonds are not scared higher by Alan's remarks, they've been scared higher by the strength in the economic numbers constantly pouring out. In fact the Fed Funds futures already have the next 25bp hike priced in. Bonds are ahead of the Fed.<g>
Alan's speech and some highlights, enhancements mine. <g>
bog.frb.fed.us
However one views the causes of our low inflation and strong growth, there can be little argument that the American economy as it stands at the beginning of a new century has never exhibited so remarkable a prosperity for at least the majority of Americans.
Nonetheless, this seemingly beneficial state of affairs is not without its own set of potential challenges. Productivity-driven supply growth has, by raising long-term profit expectations, engendered a huge gain in equity prices. Through the so-called "wealth effect," these gains have tended to foster increases in aggregate demand beyond the increases in supply. It is this imbalance between growth of supply and growth of demand that contains the potential seeds of rising inflationary and financial pressures that could undermine the current expansion.
Thus, if our objective of maximum sustainable economic growth is to be achieved, the pool of available workers cannot shrink indefinitely.
For the equity wealth effect to be contained, either expected future earnings must decline, or the discount factor applied to those earnings must rise. There is little evidence of the former. Indeed, security analysts, reflecting detailed information on and from the companies they cover, have continued to revise upward long-term earnings projections.
Thus, the rise in real rates should be viewed as a quite natural consequence of the pressures of heavier demands for investment capital, driven by higher perceived returns associated with technological breakthroughs and supported by a central bank intent on defusing the imbalances that would undermine the expansion.
While we endeavor to find the proper configuration of monetary and fiscal policies to sustain the remarkable performance of our economy, there should be no ambiguity on the policies required to support enterprise and competition.
Cheers,
Lee |
