Monday, January 08, 2007

[Not] A New Dance Step: Fed-Skirting Around The Issue

Federal Reserve member Donald L. Kohn's speech gives a refreshingly upbeat view of the economy, and it tempers the market's skittishness a bit.

I do like this guy Kohn. He seems to shoot from the hip, most unlike our previous -- or even our current -- Fed Chairman.

high noon
[Thanks to eigakoji.seesaa.net for the image.]

Of course, he has to use that Fed hot-cold rhetoric that is so "de rigueur" these days. He tells us that inflation should probably tame over 2007, and the economy should find a good strong pace; but then he throws in the usual "we must wait for the actual figures" to keep us from jumping to any conclusions about future Fed actions.

He describes the Fed's present Catch 22 this way (see my previous post for my description of the problem they face):

"Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed.... We also do not know whether the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations."

Let me put that into simpler terms. I think he is saying that the possibility that the Fed's previous accommodative monetary policy might be the factor that pushed home prices and sales to those elevated levels raises the fear that the market might react poorly if the Fed were to decide to lower accommodation even more than it already has.

This is pretty much in line with my own thinking as expressed in the above-linked post. The language he uses is typical of the Fed; they hate to implicate themselves as the cause of any of the damage that we note (prohibitive and/or speculative [depending on your frame of mind and pocketbook] housing price increases, for example), and they even apparently feel a need to scrummage up technical argumentation in defense of themselves. See this post for a description of one such econometric attempt that, IMHO, falls flat on its face.

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