Wednesday, May 28, 2008

Shorthanded Fed

Fed Governor Frederic Mishkin announced plans to step down from his post today after only two years in office. Of course, nobody knows exactly why. After all, these guys never talk—at least not until later (see Scott McClellan).

A couple of things on this: First, Mishkin was known as a strong advocate of inflation targeting. That’s noteworthy since the other former strong advocate of inflation targeting, namely Ben Bernanke, seems to have given up on that all-important concept. In fact, a recent JP Morgan analysis predicts 5 percent inflation this summer. Read it and weep. Whether Mishkin’s departure has anything to do with this is a matter of pure speculation. Is he bailing out? I don’t know.

Another sidebar to this story is the unwillingness of Senate Banking head Chris Dodd (D-CT) to move on White House nominations to two of the unfilled Fed seats. Mishkin’s resignation now leaves three unfilled seats on the Federal Reserve Board. That means just four governors remain—barely a quorum. Of course, Dodd is playing politics here, probably hoping for an Obama victory so he can get a bunch of Democrats on the all-important Fed board.

But what about the next seven months? What about the fact that it takes a bunch of months to process and confirm new members? What with the credit crunch, and sweeping changes to financial regulation, and the Fed’s current work-in-progress of lending money to non-bank broker-dealers? It’s not as though these guys don’t have any work to do. Playing shorthanded right now is not a good idea.

P.S. Today’s stronger than expected factory orders report suggests that business is relatively healthy and most decidedly not in recession. Of course, the oil factor remains a question mark. But right now, I can’t help but think of my pal Jimmy Pethokoukis’s line, “No Recession. No Bear Market. Bears Weep.”