Wednesday, June 29, 2005

Games

The Endgame
Steeped in denial, the Fed is trying to deflect attention away from its role in this sad state of affairs -- choosing, instead, to focus the debate on the so-called interest rate conundrum. The central bank can only do so much, goes the plea -- it’s up to the markets to do the rest. So far, with the federal funds rate basically at zero in real terms when judged by forward-looking inflationary expectations, the Fed has hardly done much at all. But that hasn’t stopped Alan Greenspan from going on at length in considering and then dismissing many of the factors that may account for this puzzle -- namely, faltering growth prospects, subdued business credit demand, foreign central bank purchases of dollar-denominated fixed income assets, and reduced inflationary expectations. Interestingly enough, the excess policy accommodation of the Fed has been conveniently left out of this discourse -- a rather shocking omission given the key role played by the policy anchor at the short end of the yield curve in shaping intermediate to longer-term rates through the so-called term structure of interest rates. It may well be that the real conundrum lies with the Federal Reserve, itself.
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