Suitably Flip

Fed Letter Day

What're you kidding me?

My love for Chairman Bernanke is really being put to the test.  As month after month, economists and traders wait for the Fed to ease its foot off the break, we now know that during the May meeting, Benny and the Govs were considering jamming the breaks even harder.

From the FOMC minutes released this afternoon:

Worried about the potential for inflation to get worse, Federal Reserve policy-makers at their May meeting considered raising a key interest rate by half a percentage point before opting for a quarter-point increase.
...
Policy-makers mulled these options as they weighed whether it was more likely that the economy would slow given the Fed's previous rate increases or whether soaring energy prices might touch off broader inflation. Then they approved the quarter-point increase, the 16th consecutive hike of its kind.

However, the Fed -- in an unanimous decision -- boosted the federal funds rate by one-quarter percentage point to 5 percent, the highest level in 5 years. The Fed had started the campaign to tighten credit in June 2004.

Not surprisingly, the market didn't love the news and promptly gave up the bulk of the rebound it appeared to be mounting today, somewhat salving the recent selloff.

With the economy sailing very smoothly, and with inflation signals being (using Bernanke's word from within those very minutes) "contained", one would expect the Fed to hone in toward a long-term neutral rate - neither choking growth to stave inflation, nor stoking growth with below-normal lending rates.  If they had opted for a half-pointer in May, the Fed Funds rate would already be at 5.25%, much above which it gets harder to make a case for rate neutrality.

Ben, I have every faith you know what you're doing.  But you've been working awfully hard.  Why don't you take next month off?

Comments

Fed Letter Day

What're you kidding me?

My love for Chairman Bernanke is really being put to the test.  As month after month, economists and traders wait for the Fed to ease its foot off the break, we now know that during the May meeting, Benny and the Govs were considering jamming the breaks even harder.

From the FOMC minutes released this afternoon:

Worried about the potential for inflation to get worse, Federal Reserve policy-makers at their May meeting considered raising a key interest rate by half a percentage point before opting for a quarter-point increase.
...
Policy-makers mulled these options as they weighed whether it was more likely that the economy would slow given the Fed's previous rate increases or whether soaring energy prices might touch off broader inflation. Then they approved the quarter-point increase, the 16th consecutive hike of its kind.

However, the Fed -- in an unanimous decision -- boosted the federal funds rate by one-quarter percentage point to 5 percent, the highest level in 5 years. The Fed had started the campaign to tighten credit in June 2004.

Not surprisingly, the market didn't love the news and promptly gave up the bulk of the rebound it appeared to be mounting today, somewhat salving the recent selloff.

With the economy sailing very smoothly, and with inflation signals being (using Bernanke's word from within those very minutes) "contained", one would expect the Fed to hone in toward a long-term neutral rate - neither choking growth to stave inflation, nor stoking growth with below-normal lending rates.  If they had opted for a half-pointer in May, the Fed Funds rate would already be at 5.25%, much above which it gets harder to make a case for rate neutrality.

Ben, I have every faith you know what you're doing.  But you've been working awfully hard.  Why don't you take next month off?