There’s something bleakly amusing about a Federal Open Market Committee statement that says it decided to keep its target rate at zero.
Well, actually it was 0-0.25% so the Fed could have ditched the 0.25% part, but there’s not much point – a policy rate 0 to 0.25% covers it.
The Taylor Rule, invented by Stanford Professor John Taylor in 1992 to describe what the official policy interest rate of any country should be, currently decrees that the US cash rate should be anything from negative 1% to negative 6%. (Merrill Lynch’s David Rosenberg says -1%, Goldman Sachs’ economists says -6% and thousands of others are somewhere in between).
In other words, US monetary policy is restrictive right now – it’s actually slowing the economy, not helping – so the Fed has to leave the cash market and start playing with treasuries and other longer term stuff to offset its restrictive monetary policy. But it’s not actually doing much of that just yet.
This morning’s statement from the Fed goes a step further than the statement in December, which floated that idea, but that’s all.
“The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” it said this morning.
In December the Fed said it would soon start “extending credit to households and businesses” under the Term Asset Backed Securities Loan Facility. This morning it was: we’re still gunna do that, any day now, just you wait.
Fed chairman Ben Bernanke is now the chief engineer of the USS Enterprise, Montgomery Scott, declaring to Captain Obama in a Scottish brogue over the squawk box: “I don’t have the power, captain.”
Does Obama have the power? Certainly fiscal policy has been known to produce results in these situations by shocking the patient with an intense burst of government spending – as long as it’s not wasted.
However President Obama’s chief of staff, Rahm Emanuel, told an audience of economists just after the election: “You never want a serious crisis to go to waste. What I mean by that is that it’s an opportunity to do things you could not do before.”
It’s being described as the Rahm Doctrine: that the crisis will allow the new administration to confront problems that have festered for years. That means education and health. Obama has an ambitious program and is keen to connect it to the crisis.
The argument against that is that it may be a distraction from the business of just focusing on the economy.
In any case, this morning’s New York Times is leading its front page with a report that Obama’s stimulus package would “shower” the nation’s school districts, child care centres and university campuses with $US150 billion in new spending.
Meanwhile the International Monetary Fund has come out with a new forecast for the world economy in 2009: 0.5%.
Let’s put that in a file with all the other guesses. Another one came out yesterday from the Institute of International Finance, a global industry body, which predicted minus 1.1% this year, with developed economies contracting by 2.1%.
And at the World Economic Forum in Davos, the great and the good have gathered to engage in “Shaping the Post-Crisis World”.
Gideon Rachman in the FT doesn’t like that phrase: the words “shaping” and “post-crisis” strike him as too optimistic, although he grudgingly accepts the word “world”.
Ken Rogoff, the Harvard economics professor, this morning described the mood at his first session in Davos as “cautiously pessimistic”, which probably sums up the mood everywhere at the moment – at least in official circles like central banks and government treasury departments. There was optimism, Rogoff said, about very long-term prospects for emerging markets, which one panellist described as “at least having a real economy”.
Back down off the mountain, Wall Street is cautiously optimistic this morning after the FOMC statement and reports that President Obama and his team are closing in on the idea of a “bad bank” to take all the toxic assets off the banks’ balance sheets so they can start lending again, and then everything will okay.
If only it were that easy.
This article first appeared on Business Spectator.