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In its press release yesterday, did the Fed intentionally ignore the impact of credit markets in order to prevent a full-blown financial panic?
According to the text, Bernanke & Co. are still watching inflation intently and its long-term economic view precludes it from acting upon last week's drastic credit crunch.
And, in the wake of the Fed's statement, pundits are in agreement that the Fed seems unconcerned about credit market deterioration. They also note that the Fed is sending a signal of confidence about the U.S. economy on the whole.
I buy that like of thinking, I do. But, I also remember back to some prior posts I've written.
Eight months ago, I listened to Federal Reserve President Michael Moskow speak about inflation at a breakfast in Chicago.
Paraphrased, he said:
Inflation is a self-fulfilling prophecy -- if you behave like it will happen, you will actually make it happen. Therefore, part of the Fed's role is to make pre-emptive policy changes to shape market psychology.
I wondered aloud at the time if the Fed stopped raising the FFR last summer just to head-fake the markets into believing that inflationary pressures were taming. After the non-hike (and not surpringly), inflation began to slow shortly thereafter.
Now, I am wondering the opposite. Is the Fed using psychology to keep the economy strong?
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator call 513-443-2020.
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