Blogger’s Take: FOMC Minutes

Yet another edition of our new feature: Blogger’s Take.

FED OFFICIALS REASONED last month
that risks to both economic growth and inflation had diminished slightly, but
higher inflation "remained of greatest concern," according to FOMC
minutes.

The question at hand: What should
the Fed be focused on:  Inflation? Slowing Growth? Neither?

Inflation or growth? What matters more to the Fed, better yet
which one should matter more? I’ll pick inflation over growth.

My thinking is that recessions are a normal part of the
economic cycle. Inflation that is allowed to get out of hand can be ruinous to a
country; a normal recession is not ruinous. We see a lot of folks preoccupied
with hard landing or not. What is normal is a recession followed by an expansion
followed by a recession. Market declines go hand in hand with recessions
(actually, they lead by a few months but you get the idea). This process has not
been repealed regardless of anyone’s ability to time such things. There are many
instances in history where the US stock market has declined by 30%
and then it comes back or as is the case now, is coming back from about a 50%
hit for the S&P 500. Again perhaps this can be timed or not but this is how
it works.

What is not normal is very high inflation. Staving off the
consequences of something that is not normal but in fact more damaging makes
more sense to me.

-Roger Nusbaum,
Random Roger’s Big Picture

* * *

What the Fed should focus on it is pretty clear

1) Plunging PPI, plunging
copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging
consumer credit. Those items along with the $CRB and oil were the focus of
discussion in The PPI, Gold, and Dr. Copper

2)
Decreasing credit spreads, insatiable appetite for risk, mergers, IPOs,
corporations going into debt just to buy back shares, etc, all of which are
fueling a strong stock market even as insiders are bailing hand over fist. In
other words the ability to get credit is still far too easy.

Eventually
credit spreads will start to widen on their own accord just as housing itself
died of simple exhaustion not a massive spike in long term interest rates as
everyone expected. In the meantime the risk is corporations will blow all their
cash through silly buybacks at a time when they will need the money to weather
the next storm (the consumer led recession of 2007).

Unfortunately for
the Fed there is no real solution. In fact a credit purge is badly needed and
long overdue, so the best thing for them to do is to let the market attempt to
resolve the issues instead of fighting it. After all, it was the last refusal to
let the markets sort it out that created the housing/debt bubbles. Nonetheless,
I suspect the Fed will fight the next downturn and if so gold should soar.

Hmmmm. I suppose the REAL bottom line then is that the Fed should not
focus on a single thing but rather focus their efforts on dissolving themselves
and letting the market set interest rates rather than micromanaging them to
death.

-Mike Shedlock / Mish
Mish’s Global Economic Analysis

* * *

The Fed? Do they even matter anymore?  Didn’t Hank Paulson at Treasury grab hold
of the steering wheel a couple months back and relegate Fed Chief Ben Bernanke
to the back seat with one of those Playskool steering wheels?

-Tim Iocano
The Mess That Greenspan Made

* * *

The universal challenge for policy makers is to deal with
the reality in front of them. As opposed
to other policy makers, the Fed is able to measure their progress against
market-based measures. One need only
look at the recent history of market-based inflation expectations to see that
the Fed has done a decent job on this important goal.

Ten-year inflation expectations, as measured by the spread
between the 10-year constant
maturity treasury and the 10-year constant
maturity TIPS (via the St. Louis Fed), show the most
recent level at 2.32%. This is nearly
equal to the 2.34% average seen since the beginning of 2003. At least by this measure, the Fed has not
allowed inflation expectations to run away from them.

This measure is by no means perfect. In addition it would be interesting to see
how the Fed is doing by the measure in comparison to other developed
markets. Until somebody comes up with a
better real-time measure for economic growth, we think it best the Fed focus on
inflation and inflation expectations. The temptation to try and micromanage the economy is too big to allow
policymakers to swing wildly between two (oftentimes) competing goals.

–Abnormal
Returns

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