Repercussions of yesterday’s Fed meeting continue to be felt as the gold price has now risen about $80 since the central bank announced an extension of its low interest rate forecast and more than a few columnists are taking issue with this approach. Bloomberg’s Caroline Baum chimes in with this commentary today.
What the Fed is saying, in essence, is that as the economy improves, it’s appropriate to provide as much stimulus, or support, as it did in late 2008, when the economy was contracting and the financial system was imploding.
This is a dramatic shift. Given the long and variable lags with which monetary policy operates, past Fed officials at least paid lip service to the notion of acting preemptively: withdrawing excess stimulus — a fancy way of saying they will raise interest rates — as the economy improved.
Not so the current committee, which is tilted toward doves after the annual rotation of voting members. This group seems to think it should “continue to ease as long as there is economic slack,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s a classic, elemental mistake,” he said, one described by the late Nobel economist Milton Friedman as the “fool in the shower.”
The fool turns on the water in the shower, steps in and finds that it’s still cold. So he turns the knob all the way to hot, only to get scalded when the water heats up with a predictable lag.
Given the uber-dovish FOMC voting members this year we’ll probably start hearing discussion about “when the chain catches the sprocket” again in 2012, particularly if oil prices begin to rise. In the end, we are likely to look back at this period later in the decade and conclude that the Fed held rates “too low for too long”.
What’s that old saying? Those who don’t learn from history are doomed to repeat it.