Thursday, January 31, 2008

Stop & Go Fed

Has the Fed spent too much time tinkering with interest rates? Was Ben Bernanke handed a bucketful of bad molasses from Alan Greenspan? Take a look at the following chart and judge for yourself.

For four years, between 1995-1999, there was basically no change at all in monetary policy. Nothing. Then, all of a sudden, the Fed started raising the fed funds rate in 2000. So, loose in 1999, followed by tightening in 2000.

Then, the Fed put the pedal to the metal in ’01, ’02, ’03, ’04. That was their big GO period.

As we know, in ’05, ’06, and early ’07, the central bank hit the brakes. It had officially entered the STOP camp.

Lately, it’s been one big GO.

Remember, all this Fed tinkering occurred in less than ten years. Stop. Go. Stop. Go. Monetary whiplash.

I prefer monetary stability. And I just can’t help but wonder whether the current Fed chair wasn't dealt a really crummy hand from the Greenspan Fed. It's not Bernanke's fault. All the previous monetary tinkering landed him on the Greenspan shovel brigade. He's cleaning up.

Bottom line: All this Fed fine-tuning can’t be great for the economy.