That leaves us with the age-old question of whether or not the central bank will over-tighten us into a recession. Fed policies have prevented oil inflation from spreading throughout the economy, but they should quit raising rates while they’re ahead.
Fed bankers and their fellow travelers have just gathered for an annual confab in Jackson Hole, Wyoming. It’s a scary thought. Like a tennis player grooving a bad backhand, mistaken monetary ideas often reappear in the foothills of the beautiful Grand Teton. Alan Greenspan, in his keynote speech, referred again and again to the importance of expectations about growth and recession, inflation and deflation. But instead of deferring to the wisdom of key market-price indicators -- like gold, broad commodity indexes, and bond rates -- he talks about complicated models of something called “risk management.”
Right now, stable commodities (excluding energy), low bond rates, and a steady dollar are signaling low inflation and moderate economic growth. But Greenspan’s neglect of the commodity-price-rule approach to policy makes one wonder if he is turning a blind eye to the message of the markets.
After all we have learned about the failure of central planning in the last century, are intelligent people today willing to accept the notion that government banks are smarter than markets? Or must the prudent investor worry that the Fed will overreact to home prices and energy costs by once again draining too much money out of the economy and smothering the growth effects of supply-side tax cuts? Are any of the Fed bigwigs in Jackson Hole watching the market price-rule indicators? Do they understand the teachings of Milton Friedman and Frederich Hayek -- that markets, which contain more information than economic models, are the best judges of economic “risk management”?
Respondents to a recent CNBC poll sizing up the leading candidates to succeed Greenspan next year chose “other” by a wide margin. This particular segment of the investor class is trying to signal the White House that a truly market-driven monetary policy is the surest way to preserve low-inflationary prosperity. Is the White House listening?