RE: PKT Seminar: FRB Theories

[Doug Henwood <dhenwood@xxxxxxxxx>]

Does the Fed really need a theory to operate by? Volcker's embrace of
monetarism was in all likelihood a ruse, designed to cover driving up
interest rates to 20%. They're just a bunch of pragmatists, who want to
keep inflation low, unemployment tolerably high, but stopping short of a
debt deflation and political rebellion. We may not like it, but is it
*that* hard to figure out what they're doing?

Are they wrong to associate present levels of capacity utilization with
an acceleration of inflation? That's a different question from whether
inflation is now serious or trivial, obviously. But they've made it
clear, and the credit markets have made it clear, that they do not want
the inflation rate to rise much past the present 3% level. That may be
the wrong target, but are they wrong to suspect that inflation rates are
poised to rise? They've already risen from about 2.5% in early 1994 to 3%
now.

Several other questions:

Is the Fed ever justified in tightening? If so, when, and by how much.
And when should they subsequently loosen?

What is the evidence that tightening helps the banks at the expense of
mutual funds and the stock and bond markets?

Should a serious bear market develop in stocks, should the Fed loosen to
stop it? Should the stock and other financial markets get seriously and
vertiginously overvalued, should the Fed tighten to burst the bubble?

Doug

Doug Henwood [dhenwood@xxxxxxxxx]
Left Business Observer
212-874-4020 (voice)
212-874-3137 (fax)