The challenge, then, for monetary policymakers is to be on high watch as developments unfold, to evaluate them with an open mind, and to adjust the course of policy to achieve our dual mandate—promoting price stability and maximum sustainable employment.
It is precisely this dual mandate that some people on this board and Russ's board do not understand. We do not have to agree with it but we must be aware of it. I was talking to Paul Kasriel on Friday and he brought it up to me when I asked his opinion on the latest set of numbers. I always make a point to ask his opinion as I do not want to influence him by stating mine first.
Quite frankly the Fed is in a box. A box of their own making (Paul's words), perhaps a box as a result of their dual mandate strategy (my thinking as we did not discuss this point but I would GUESS that he would agree). The rest of what I am typing in this paragraph are MY thoughts. If the FED had a mandate like the ECB of maintaining inflation at 2% I really do not think interest rates would ever have fallen to 1%. We would not have been priming the Y2K pump or any of the other mistakes this Fed has made. Instead the Fed is constantly trying to prevent a recession, and in doing so has created bubble after bubble after bubble, each one bigger than the next.
If one looks at just the data, a slowdown in M3, below par recovery for jobs, falling consumer spending in this last month, factory employment down the last 3 months, leading indicators down for the last 5 straight months, housing showing signs of stalling there is a case to be made for no hike in December. Those are Paul's words, not mine as I just asked him how he felt about the numbers that just came in. Please note that given the strength of the job numbers the previous month, neither he or I expects the Fed to pause in Dec.
Both of us expect at least a bias change if not an outright pause if the next set of job numbers is weak. I think if retail sales are slow this Christmas, the next jobs numbers could be an out and out disaster. That latter thought is mine and I want to be very careful here that people do not confuse my thinking with that of Paul Kasriel. The numbers will be what they will be, but if those numbers are bad (and leading indicators do not suggest they will be particularly good), the Fed is likely to Pause in Feb. The Fed will by then, have had both Dec and January to look at, will probably act in accordance with their dual mandate.
In short: Poor jobs, housing slump, consumer spending falloff, the FED will Pause. Janet Yellen is practically screaming the same thing. There are others on the FEd that are hawks and would not agree. In the end, Greenspan will decide the issue and history suggests that he will be loose.
There is one other factor to mention and Paul brought it up: Greenspan's legacy. Greenspan will be out at the end of this term. He will not want to go out in a recession, and he certainly will not want to go out in a deflationary crash. Personally I think a recession in 2005 or early 2006 at the latest is a given. How much stimulus it will require to avoid one is unknown. I do not think it's possible. There are just too many maladjustments.
Mish |
