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Wednesday, July 23, 2003
Why Is The Fed Afraid Of Lower Inflation?
July 01, 2003
I have been wondering why the Fed has recently became obsessed with “an unwelcome substantial fall in inflation.” After all, if the economy is “cleared for takeoff,” why would the Fed care if inflation falls, or even if deflation occurs? What’s wrong with 4% real GDP growth and zero inflation?
One of the explanations is that the Fed wants is to create a diversion. The other explanation has to do with fear of an aborted takeoff.
For what it’s worth, my research suggests that the real fed funds rate is a lousy predictor of future economic activity. The real M2 money supply is a far superior predictor. As a matter of fact, the last time I checked, real M2 is a component of the Conference Board’s Leading Economic Indicators index; the real fed funds rate is not. But I’m not here to justify Fed policy, only to rationalize it.
July 01, 2003
I have been wondering why the Fed has recently became obsessed with “an unwelcome substantial fall in inflation.” After all, if the economy is “cleared for takeoff,” why would the Fed care if inflation falls, or even if deflation occurs? What’s wrong with 4% real GDP growth and zero inflation?
One of the explanations is that the Fed wants is to create a diversion. The other explanation has to do with fear of an aborted takeoff.
For what it’s worth, my research suggests that the real fed funds rate is a lousy predictor of future economic activity. The real M2 money supply is a far superior predictor. As a matter of fact, the last time I checked, real M2 is a component of the Conference Board’s Leading Economic Indicators index; the real fed funds rate is not. But I’m not here to justify Fed policy, only to rationalize it.