Money Panic?
The Fed's "opportunistic" inflation policy lets it keep its monetary pedal to the metal
interactive.wsj.com
By Jim McTague
AUGUST 20, 2001
When core inflation numbers began to rise precipitously in the first quarter of 2000, the FOMC slammed on the brakes, hoping to engineer a few quarters of sub-par growth to bring the rate back down to a more manageable level. But the hikes were exacerbated by unexpected shocks like the surge in oil prices, an electricity crisis, a credit squeeze and a strong dollar. The FOMC action inadvertently sent the economy into a swan dive.
In reaction, the Fed now has the liquidity throttle wide open. The money supply, as measured by the Federal Reserve Bank of St. Louis' MZM measure (consisting of currency and all check-type deposits, including money-market funds) has been growing at a torrid 20% annual pace. Long-bond yields were climbing until recently, reflecting, in part, investors' fears that the sudden easy-money policy might engender an inflationary spiral in six months to a year.
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"I do agree that the current policy is focused on reviving growth and not worried about inflation," says former Fed Vice Chairman Alan Blinder, now an economics professor at Princeton University.
Janet Yellen, an economics professor at Berkeley who served as a Fed governor with Blinder, declares, "They definitely are stepping on the gas pedal! Inflation has increased and likely has been above the comfort level of a number of FOMC members over the last year or so.
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The opportunistic strategy attempts to correct for shortfalls in demand by pushing the economy slowly back to, but not beyond, its potential to produce without a buildup of inflation. For all the aggressive rate-cutting, the Fed's staff doesn't see the economy approaching its full potential for at least seven more quarters.
The Bush administration has been more optimistic. Lawrence Lindsey, the President's economic adviser and a former Fed governor, says the Bush tax cuts should result in a return to robust growth next year. |
