Some financiers are really unhappy with the idea of the Fed slowing down on rate cuts. Bloomberg stenographs:
The headline in the financial futures market these days says Federal Reserve Chairman Ben S. Bernanke is withholding some vital information: The economy is so bad the central bank will have to lower interest rates at least three- quarters of a percentage point to avoid a recession.
Bernanke’s two rate cuts since September failed to reassure the bond market, where volatility has risen four of the past five weeks, according to Merrill Lynch & Co.’s MOVE Index. Yields on Treasury bills, the haven for bond investors in times of turmoil, are near their lows of August, when losses on securities backed by subprime mortages froze credit markets.
While the record low dollar and the fastest inflation in 14 months give policy makers reasons to keep the target rate for overnight loans between banks at 4.5 percent, traders expect 3.75 percent early in 2008. Interest-rate futures on the Chicago Board of Trade show the Fed will cut borrowing costs in December and again in the first quarter, as the worst housing slump since 1991 deepens and retailers including J.C. Penney Co. and Macy’s Inc. forecast slumping sales.
Investors are sending the message to Bernanke that “you’re wrong and we’re going to lead you to the next ease,” said Thomas Tucci, head of U.S. government bond trading in New York at RBC Capital Markets. The firm is the investment-banking arm of Canada’s biggest bank.
I didn’t know it was the Fed’s job to avoid a recession.
I am aware of that little law that calls for the Fed to “maintain full employment” as one of its objectives. However, I understand that to mean full intertemporal employment. The Fed must be cognizant of expected future employment as well as present employment. If a little more employment now leads to a lot more unemployment later–by, for example, stoking inflation to maul the value of the US dollar–then the Fed is legally obligated to pursue a course that is more stringent in the short run, to defend the dollar’s credibility and give foreigners a reason to stick their money here.
Thus, it is disingenuous and legalistically shortsighted to argue that the Fed has a “mandate” to “avoid a recession.” It is Orwellian to see this manufactured fiction of convenience repeated in 80% of articles concerning the Fed.
One of the reasons I am so much more “bearish” on capitalism than I used to be (I still consider myself one) is that capitalism, at least in this cycle, seems entirely focused on privatizing profits, lying about inflation to justify wage increases that aren’t, and then socializing losses to creditors of United States banking institutions, namely American savers and, to an even greater extent, foreign central banks and institutional investors.