...again, on the FED...from another thread:
CLEVELAND FED WARNS AGAINST DANGER OF 'EXCESSIVE' STIMULUS
By Steven K. Beckner
Market News International - The Federal Reserve needs to be "alert" to the risk that it could provide "excessive"
stimulus in its effort to "fine tune" the economy out of its current slump, according to a Federal Reserve Bank of
Cleveland publication.
In the Cleveland Fed's February "Economic Trends," the lead essay warns that the "truly worst case scenario" is not
a "protracted" slowdown but a situation in which core inflation would "continue to accelerate" as the economy goes
through an adjustment process.
The essay is usually written by Mark Sniderman, the Cleveland Fed's director of research and top monetary policy
advisor to Bank President Jerry Jordan, a voting member of the Fed's policymaking Federal Open Market Committee.
Noting that the FOMC has cut official interest rates by 100 basis points in response to "a suddenly emerging
softness" in demand and a decline in short-term market rates, the essay asks, "What comes next?"
"It is not clear how soon and with what intensity economic growth will resume," the essay continues.
"Some analysts, claiming the economy's underlying growth potential has been exaggerated for several years, declare
that unemployment has a long way to rise before reaching its new equilibrium rate," it continues. "From this
perspective, significant further easing in monetary policy seems appropriate."
However, the staff-written essay goes on to issue a strong caveat. "But a truly worst-case scenario is one in which
core inflation indicators continue to accelerate -- as they did last year -- while the economy works its way through the
adjustments ahead."
"In a worst-case scenario, people become so convinced of what they 'know' and so preoccupied with overriding
ordinary business cycle dynamics that economic policy stimulus eventually proves to be excessive," the essay adds.
"Periods of below-par economic growth bring difficult conditions, but these usually pale in comparison to the
ultimate damage that cyclical fine-tuning can inflict," the essay concludes. "Though such damage may seem remote
today, now is the time to be alert to the prospect." |
