Tuesday, November 3, 2009

Is the Fed Really This Clueless?

WSJ has a feature this morning on Brian Sack, executive vp of the Markets Group at the Federal Reserve Bank of New York.

WSJ tells us that:
A decision to tighten monetary policy could still be months away. And officials aren't yet sure how big the money-draining operations will need to be. In the meantime, Mr. Sack's desk is developing several contingency plans.
Last I looked, Bernanke hasn't increased the money supply since February. It is absolutely absurd to write as though the Fed hasn't been running a tight monetary policy for months and months.

Interest rates are low, but this is more the result of low real rates than Fed activities. If the Fed starts draining at any time in the near future, you would have the greatest deflation of prices and money supply in the history of the earth.

Things change, of course, if banks start to lend out some of the record high excess reserves that they have on deposit at the Fed. Then, the Fed better drain and fast.

But, if the Fed thinks it may have to start draining because manipulated GDP is up for a couple of quarters, then we could face one of the greatest economic contractions of all time. I truly hope the Fed isn't this clueless.

1 comment:

  1. Fed isn't clueless, and WSJ isn't either. They just work for their owners. WSJ and the media plant things in public mind, Fed and the boyz make them happen. You know the results. They make perfect sense from a certain point of view.