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Mira Farka, assistant professor of economics, CSUF  

Click Here for a Bio of Mira Farka


Tuesday, June 17, 2008
Will the real Fed please stand up!
Wednesday, July 30, 2008
Ready for the big one?
Out of ammo
Despite the posturing, the hawkish tone, the never-ending warnings about inflationary pressures, much like we anticipated, the Fed did not raise interest rates in its June meeting. Being buffeted by a series of negative shocks, a continued house price decline, a rapidly slowing economy, and an excessively volatile financial sector, the Fed decided to maintain its accommodative bias. I, for one, concur with this decision, at least for now.

There are however, dangers associated with this scenario. Inflationary pressures have escalated and oil prices continue to set record daily highs. It won’t be long before the current high energy costs filter through the economy placing further upward pressure on other prices. The excess liquidity provided by the Fed over the past nine months will certainly add to the current build-up of inflationary pressures.
Ironically, it seems that the Fed has run out of ammo this time.

It lowered its target rate by 350 basis points in a span of seven months – the most aggressive move in history. It designed conventional and unconventional tools to bail out the financial sector (remember Bear Stearns). In maneuvering and imagination, the Bernanke Fed has vastly surpassed its predecessor – the Greenspan Fed. The irony comes from the fact that Bernanke’s Fed was supposed to be the more hawkish, more willing to fight inflation, and less concerned with financial market developments than Greenspan’s Fed. But Wall Street jitters of late last summer seem to have spiked a high fever in the Fed, followed by an unprecedented overreaction. 

Where does this leave us now? With an ammo tank almost empty, and a Fed that jumped the gun a few months too soon, and a few hundred basis points too low, we’re pretty much on hold. The Fed is unlikely to tighten over the next few months given that housing market blues are far from over (an optimistic scenario would put it half-way through) and we have yet to see a bottom to the current economic slowdown. In the meantime, I see little hope of a drop in oil prices.  Against this backdrop, I cannot help but feel that the only bullets left for the Fed, at least for the time being, are hawkish words and a concerted effort to anchor the ever-increasing inflationary expectations without taking any drastic policy actions in the near future.