Is the Fed playing a game of chicken?


I don’t know if they are, but CNN/Money seems to think so:

“With stronger-than-expected numbers coming in almost daily and the Fed sitting on its hands, some observers say the central bank is playing chicken with the economy, creating the risk of unnecessarily painful interest-rate hikes down the road. But some other analysts see plenty of potential trouble spots for the economy and say the chances are small that the Federal Reserve will let inflation get out of control.”

Is the Fed lying? “So far, the Treasury market apparently believes the Fed’s story that the economy needs to grow at a robust pace for a while before the central bankers can stop worrying about a possible, dangerous drop in prices, which would hurt corporate profits and economic growth.

But some economists don’t buy it, believing the Fed is manipulating the bond market to keep long-term interest rates low. Though the Fed’s main policy tool is a short-term overnight bank lending rate, it also can affect longer-term rates — as was made painfully clear this summer, when some Fed bungling momentarily sent long-term rates soaring.”

This strikes me as a bit chicken little: The long term, 20 year trend in interest rates and inflation has been downwards; Deflationary forces from overseas (China & India) are pressuring prices lower; Huge productivity increases constantly pressure the cost of goods and services lower in the U.S.

I see little danger of inflation, and or more concerned about the economy faltering by mid-2004 — a situation I presently see as a 40% possibility. Hence, the longer they leave rates low, the better.

The Fed’s game of chicken
By Mark Gongloff, CNN/Money Staff Writer
November 25, 2003: 5:45 PM EST

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