The Fed at the Buzzer

The other March Madness? The Federal Reserve, in complete crisis mode, is widely expected to cut the federal funds rate this week, but one of its own is taking issue.

Lee Hoskins, a former president of the Cleveland Fed, writes at Forbes and (aided by Robert P. Murphy of the Pacific Research Institute) insists that “further loosening at this time would be a mistake, and would also send an alarming signal regarding future monetary policy.”

The Fed needs to quit chasing declining GDP growth and instead focus on curbing inflation and anchoring inflation expectations. Recent allusions to the stagflation of the 1970s are appropriate. Gold has been hitting all-time nominal highs, and oil prices have shattered the inflation-adjusted record set in 1980 during the Iranian hostage crisis. The dollar, meanwhile, is trading at all-time lows against the euro.

Consumer price inflation was 4.1% in 2007 (the highest in 17 years) while the producer price index rose 7.4% — the most since 1981. Amid these alarming trends on the inflation side, output has stalled. Real GDP grew at a meager rate of 0.6% in the last quarter of 2007, and the private sector shed 101,000 jobs in February. The beginnings of stagflation are upon us.

Greg Mankiw, Bushie-turned-Harvardian, sees major drama at the Federal Open Market Committee: “Do the inflation hawks still on the FOMC (Charlie Plosser perhaps) have a similar view? Will they dissent and perhaps even become openly critical of Fed policy if large interest rate cuts continue? It is a particularly fascinating time to be a Fed watcher.”

Yep, professor, I only hope people will still squeeze in time for some basketball …

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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