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Laissez-faire: The Best Fed Policy Is To Stand Pat
By EconMatters
There was nothing really new out of the 2-day FOMC (Federal Open Market Committee) meeting on Nov. 1-2 without much indication to the widely anticipated further quantitative easing (QE3). For now, the FOMC has basically decided to adopt a wait-and-see stance by maintaining its current policy including Operation Twist through 2012, and keeping the benchmark interest rate near zero to at least mid-2013.
Nevertheless, the more important (albeit coded) message is how much more pessimistic the Fed has gotten just within the past five months. Below are the table from the Fed latest November economic forecast with the prior projection issued in June.
As the table illustrates, the Committee has significantly downshifted the GDP growth outlook, which suggests the Fed is as usual a step behind reality reacting to the summer market sell-off and the weak part of the year that started after Fed's June guidance.
The problem is that by equating past market performance to the real economy, the Fed is once again risking doing too much, too quickly, at the wrong time, as in the case of QE2. Just think about how much better the economy would have been without the QE2-inflated high energy, and commodity prices? (For more detail analysis, see QE2: An Unmitigated Disaster?)
Moreover, Fed's inflation projection, in our opinion, is too optimistic--with a deflationary bias--given the global synchronized liquidity injection since the 2008 crisis, and the robust emerging markets future demand outlook. (For more analysis on inflation, see RIP Deflation)
The U.S. Consumer Price Index (CPI), including food and energy, already jumped 3.9% year-over-year in September, while the wholesale PPI (Producer Price Index) also surged 7% year-over-year. Moreover, most of the recent economic indicators including trade and freight data are pointing to an increasing risk of inflation or stagflation, instead of deflation. (On a side note, we never get the rationale behind Fed's focus on the "core" consumer inflation, i.e., excluding food and energy, since these are necessities that consumers have to pay on a daily basis.)
Moreover, we are also alarmed by the shifting dynamics within the FOMC members which would suggest an increasing likelihood of another QE2-like disaster. The behind-the-scene story inside the Committee is the emergence of one FOMC dissent--Chicago Fed President Charles Evans-- in favor of further policy easing. Chief Economist of JPM, Bruce Kasman, noted in a Bloomberg interview that Evans' dissent probably reflects the concerns of at least three or four other members on the committee.
After the summer doldrums, the Q3 2011 GDP number is already starting to turn around, jobs numbers are getting better, and there are other signs that the economy is on the mend as well. So the best policies right now for the economy is ironically
- Gridlock at U.S. Congress, which means nothing would get passed or implemented, and
- The Federal Reserve standing pat.
These need to take place so to give business as well as consumers a break from the continuing legislative burden, and the artificially inflated food, energy, commodity input costs courtesy of Fed's two rounds of QE.
Laissez-faire, literally means "leave it along", is probably a hard concept for the U.S. Keynesian policy makers to swallow, but since nothing else seems to have worked out as planned, now would be a good time to try something different for the greater good of the real consumer economy vs. the Wall Street "trader economy".
Albert Einstein once said "Insanity: doing the same thing over and over again and expecting different results." QE3, if disbursed with the same methodology as QE2, would be exactly that--Insanity.
Further Reading:
The Pitfall of Rock Star Economists
Marc Faber: Long The Dollar, But Occupy The Fed
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Hard to see anything else except more ZIRP for more countries, more QE, more massive money printing. The only other alternative is global recession/depression (perhaps some revolutions or at least the break-up of the EU). The CBs and TBTF banks do not want revolution or depression. I just can't see anything but a flood of fiat coming our way. That is what I am positioning for.
We know two things about Ben Bernanke and the Bernanke Fed: he stated flatly that "the housing situation was containable" (false) and "he consistently over-states growth prospects"--both of which are a sign that a: he is doing the right thing in being terrified of deflation and b: that falling prices continue to be the problem not rising ones. What no one talks about is just plain old "default risk" since "the Fed Chairman's numbers consistently back up the claim that" a: the "housing market is not at risk" and b: "growth is a lot more than actually happens." Hence my determination that "default risk will be upon us post haste."
I'm think of starting a petition to have a constitutional amendment calling for the death penalty for anyone using the Einstein "Insanity" quote.
The overuse of this quote is growing assymptotically.
How about the death penalty for those that continue to ignore it?
The sentiment of the quote is fine. But it long ago lost any surprise value it had, and needs to be retired
Blah, blah, blah. Yeah, the Fed's ZIRP policy to infinity is awesome. Good thing they decided to wait and see before doing anything else.
The phrase laissez-faire means "let do", but it broadly implies "let it be", or "leave it alone."
The Dude can not even 'cut & paste' and get it right!
If the Fed "does" nothing ...then why do we need the Fed?
Exactly.
I have been saying this for a while (with many others), WHY DO anything when doing nothing has worked so well so far. The real issue is how long the governments around the world can sustain the bread and circuses. When the bread stops, then shit gets real, not before.
Most people do not realize how much governments actually prop up private businesses, especially those in the communications, agriculture, and tech industries.
Bernank and his Wall St masters ARE the (not so) INVISIBLE HAND OF THE MARKET.
and the government(s) are their delivery boys and messengers.
Did I just read this article on zerohedge or cnbc.com? The best thing for the Fed is to stand pat? Come on. And Laissez-Faire what? Laissez-Faire isn't holding rates at 0% or doing operation twist, or standing behind the FDIC, or backing 95% of mortgages.
There is a very real cost for creating capital (this is the only way eCONomics can stay connected with reality), I will agree with you in so much as the ONLY thing the Fed should have been doing long ago was slowly increasing interest rates.
But I digress as it my be a mute point without a debt jubilee (which means WWIII). The world's economic and monetary systems still rely on infinite growth in a world with finite resources. Good luck with that.
Our issues are much deeper than can be solved by QE. They can much better be solved by getting rid of banking cartels & too big to fails. But, that is the last thing that those in power want to do, so it goes on.
"Insanity is doing the same thing over and over again and expecting the same result: see binomial theorem, black swan events, even money favorites at the racetrack."
Einstein also said that God doesn't play dice with the universe, which means there is no randomness, everything is patterned, biased, based upon some context. randomness is a human construct which is necessary to allow science its meager gains.
What would Einstein do? QE whatever, he is the man who had little or no faith in what splitting the atom would accomplish for mankind, but who did it anyway.
forward this to steve liesman