Re: Can the Fed set the long-rate?

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

>Randy Wray wrote:

>>the fed wanted to try to "fine tune" the economy thru countercyclical
>>interest rate adjustments, thus, abandoned the "peg".
>
>Ok, let me be more explicit then. A Marxian view of central banks is that
>they're ruling class institutions - ones capable of taking a much longer
>view than market participants, but still responsive to r.c. preferences. In
>this case, the r.c. didn't want the Fed to keep long rates "artificially"
>low. Many PKs seem not to share this class analysis, apparently believing
>that the central bankers are simply in the grip of bad axioms. But not
>wanting to attribute anything to anyone, I want to hear Paul and others
>offer their explanation of why the Fed abandoned the peg.
>
>Doug
-----------
I don't think the motivation had anything to do with the desire
of the Fed to fine tune the economy.  Rather it was Chairman
Eccles' concern about the inflationary threat if the Fed had to
continue providing whatever money was needed to peg interest
rates at low levels.  War time controls had been gradually lifted
over the previous several years.  The inflation rate in 1950 was
5.8%, up from -1.8% in 1949.  Eccles fought for a long time
against the Treasury officials who represented the political
views of the administration, to be free of the war time peg.  He
finally succeeded in the famous Accord of 1951 in getting a small
increase in the rates.  However it took another couple of years
before the Fed, under Chairman Martin, was able to fully abandon
the peg.

William F. Hummel