Does the Fed see Bubble Trouble?

Critics of the Federal Reserve warn that its low interest rates are boosting prices for stocks, bonds and houses to unsustainable levels. Some Fed officials, it turns out, may share those concerns, minutes of the Fed’s January meeting show.”

Thats the lede in a WSJ article today on some concerns the Fed is having about maintaining the ultra accomodative interest rates, now at 46 year lows. You can see the Minutes of the Federal Open Market Committee here.

Greg Ip, WSJ’s Fed watcher, writes: “A minority of the Fed policy makers remained uneasy at the January meeting with even the less-restrictive commitment to patience in raising rates. They worried it could “shape expectations” in ways that “could complicate the conduct of policy,” and is no longer needed since the economy is growing strongly, the minutes say.”

Of course, that was back in late January — before the awful February Jobs report, and literally, one day from the market making a short term top on January 26. Since then, the markets have mostly headed south for 6 weeks.

And, the Fed has become somewhat less Bullish on the Economy in the intervening time.


Therein lies the difficulty of not only ‘guessing’ the future, but then putting into effect a policy which also impacts that future. Its is a Herculean — some say impossible — task, for which the Fed, according to many critics, is not particularly well suited. They must walk a razor’s edge between adding fuel to a fire (as some now accuse them of) or choking off the oxygen and smothering a nascent recovery (an eventuality anyway, according to other critics):

“Officials also were divided on the direction of inflation. Some pointed to low interest rates, tax refunds, strong commodity prices and scattered signs of businesses raising prices as evidence of risks of higher inflation. But others, and the Fed’s professional staff, thought rapid growth in output per worker, which holds down production costs, high unemployment and unused business capacity probably would nudge inflation down a bit. The latter view currently prevails. On Tuesday, the Fed said it still saw a slight risk of inflation falling too far.”

And as we have discussed prior, I do not believe the Fed’s hands are tied when it comes to making policy in an election year (See The Fed, Elections and Rate Changes).

Regardless, the Fed’s ability to navigate in murky and uncertain economic waters, especially during a period of unprecedented flux, is questionable at best.

Oh, and one last thing: When they do a good job, nobody notices.

Being the most powerful economists in the world doesn’t necessarily sound like its a whole lot of fun . . .

Fed Internal Debates May Heat Up
Greg Ip
Wall Street Journal, March19,2004;PageA2,,SB107963420584959294,00.html

Minutes of the Federal Open Market Committee
January 27-28, 2004

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