11-12-2007
Fed policy, much ado about nothing
| As usual, today's Federal Open Market Committe (FOMC) decision on rates is attracting a lot of attention by market participants. Recent academic studies have otherwise shown that the correlation between Fed policy and future direction of the economy is far less important than market seems to recognize. In other words, central bankers are not as good, in steering future course of the economy, as the market think they are. Euro is bouncing back against Yen and Us Dollar, in anticipation of a 50 basis points (a basis point is one hundredth of one percent) and markets have rallied somewhat over the last few sessions. But inflation measures, even according to the restrictive measurement of Fed, which excludes food and oil, do not Warrant as large cuts in rates as the market is anticipating. Despite clear signs of substantial reduction in growt rates, Fed should not give in to the very dangerous game whereby market pushes in one direction and the central bank delivers what the market is expecting. Rather than steering the economy, Fed seems to be steered by the the market. |