August 13, 2003

The Fed moves to continue its ongoing devaluation of the currency, voting to keep interest rates artificially low. The major worry of the Fed is that there may be some slowing in its highly successful policy of reducing the value of money. Behind all this is the Krugman/ "Keynes" theory of "deflation", defined by CNN this way:

Deflation is an unstoppable drop in prices that hurts corporate profits, leading to more layoffs, which saps demand, hurting prices even further.

Further evidence in my view that the Fed -- and the economics profession generally -- is overrun by witch doctors and astrologists, not scientists or even competent dentists (reference here to a famous line from Keynes).

More:

Though the fed funds rate is at its lowest level since 1958, longer-term interest rates have risen recently, spurred by a selloff in the bond market, anticipating that the economy is poised for a rebound and that the Fed will have to raise interest rates soon to fend off inflation. The Fed has tried to indicate it will keep rates lower for longer than usual in an environment where inflation and the labor market are slow to recover.

But the Fed has lost some of its credibility with bond markets, after raising and then dashing expectations for more-aggressive bond-buying and rate-cutting, leading to wild swings up and then down for bond prices.

"In crafting today's FOMC statement, we believe Fed officials were undoubtedly influenced by the perception that mixed signals from the Fed, and possibly some loss of credibility, accounted for some of the recent surge in bond yields," said UBS Warburg chief economist Maury Harris.

The volatility has led many analysts to call for the Fed to be more specific about its goals for inflation, to eliminate much of the guesswork in handicapping Fed policy. But most Fed officials, including Chairman Greenspan, would prefer not to engage in so-called "inflation targeting" ..

Posted by Greg Ransom