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Blame the Fed?
Posted By Barry Ritholtz On May 30, 2006 @ 6:30 pm In Federal Reserve,Investing,Markets,Psychology,Trading | Comments Disabled
As you might have suspected, I disagree with
those who are blaiming today’s whackage on the Fed; In particular, Michael Moskow’s interview with CNBC’s Steve Liesman.
Bob Marcin, whose views I always respect (tho don’t necessarily agree with) blames Moskow as to the causes of the selloff.
"In my opinion part of the market’s decline is due to the Michael Moskow CNBC
interview this morning. I think the Fed and Mr. Moskow just don’t get it.
They continue to press the rate hike story. It’s a mistake. The real estate
market is in disarray. Consumption is slowing. And much more slowdown is baked
in the cake.
And this glorious morn, we get to listen to Moskow pitch his "personal"
inflation target of 1-2%. Well, that’s absurd.
Just 2 years ago, Easy Al took rates to zero because the PCE was at 1%. How
can the deflationary depression scenario come out at 1% inflation, and an FOMC
member have the same rate in his normal target range? You can’t, period.
If 1% gets us a Fed panic, I humbly suggest taking the range to 2-3%, with
the midpoint being the real target. Then, the pause option becomes much more
I am on the record calling 1% Feds fund a mistake. I want to be there for
this call. I think a second half material slowdown is a done deal. Give me a 6%
Fed funds this year and I promise you a recession next."
Then why the sell off?
There has been an ongoing technical decay in the markets for sometime now,
and that’s a reflection of all these seperate elements. The Fed is merely one
(amongst many) issues weighing on equities. I would place a heavier emphasis on
the emerging markets meltdown, the commodity correction, the dollar’s slippage,
WalMart’s numbers showing high energy prices biting consumers, GM’s downgrade,
and the general real estate/housing slowdown, on top of all the cyclical factors
we have mentioned.
But since the Fed is the topic at hand, recall how we got much of this
reflation/inflation: It was that very same 1% that lit the fire the Fed is now
trying to contain.
Hobson’s choice dilemma all Fed Chiefs must face: On the one hand, if
they overtighten, they will force the economy to slow too much, and risk a
recession. On the other hand, if inflation gets away from them, it can become a
runaway wildfire. They have a very hard time playing catch-up, given the
self-reinforcing tendency of inflation to feed on itself. So they end up forcing
an even more severe recession.
I think the US economy is resiliant and multi-faceted — and the Fed knows
this. Historically, we have shown the ability to bounce back from all kinds of
problems. The Fed knows this also.
This pair of choices is why, IMO, the Fed tends to overtighten. The always
rebounds from a recession, and relatively quickly, also. On the other hand,
1970s-style inflation haunts the dreams of all economists and especially those
who sit on the Fed. I suspect soft landings are mere serendipity, and not the
result of brilliant Fed policy.
Given this choice, it’s not too hard to see why the Fed is likely to
over-tighten. Of they are wrong, we get a mild recession, which we always bounce
back from. Let inflation get away from the Fed, and (shudder) it gets ugly.
Hence, they do what must be done to keep inflation well contained . . .
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