Get ready for a 2% Federal Funds rate:

At least, that's the impression one gets from reading Fed "hawk" William Poole's recent speech, superbly interpreted by Mark Thoma. As Felix Salmon remarks:

Mark Thoma deserves some kind of medal for doing this. Fed speeches are long and dense; Thoma's worked out a way of making them much easier to read without losing any of their subtleties. In this one, William Poole comes to the defense of the "Fed Put" against the moral-hazard brigade. Well worth reading, or at least skimming.

Poole is supposed to be the one resistant to easy money, but in his (somewhat defensive) speech he claims the Fed looks, or should look, beyond Wall Street when it makes policy. If it bails out the stock market, well, that's just a by-product of helping everyone else.

Apparently, Jim Cramer's message issued this summer finally got through.

• "Bill Poole has no idea what it's like out there!"
• "My people ... are losing their jobs!"
• "The Fed is asleep!"
• "Bill Poole is shameful!"
• "Cut the rate."
• "Open the discount window."
• "Bill Poole, listen to me. There was a president by the name of Hoover, and no one thinks much of him now."

Did Poole listen to Cramer? Apparently so, because there is this passage in Poole's 30 November speech:

The U.S. stock market, between its peak in 1929 and its trough in 1932, declined by 85 percent. Question 1: If the Fed had followed a more expansionary policy in 1930-32, sufficient to avoid the Great Depression, would the stock market have declined so much? Question 2: Assuming that a more expansionary monetary policy would have supported the stock market to some degree in 1930-32, would it be accurate to say that the Fed had “bailed out” equity investors and created moral hazard by doing so? I note that a more expansionary monetary policy in 1930-32 would, presumably, have supported not only the stock market but also the bond and mortgage markets and the banking system, by reducing the number of defaults created by business and household bankruptcies in subsequent years. [...]

I can state my conclusion compactly: There is a sense in which a Fed put does exist. [...]

When there is a high degree of confidence in the central bank, everyone should believe that the central bank will respond to events that might otherwise drive the economy into recession. In this sense, a “Fed put” should exist. A central bank is supposed to do what it can to maintain employment at a high level.

Bring on the low, low rates.


posted by Quiddity at 12/03/2007 09:41:00 AM