Friday, February 22, 2008

Bernanke's Fed carves rate policy from boomerang tree

Fed Sees Rate Low `for a Time,' Then Chance of `Rapid' Reversal, By Scott Lanman
Federal Reserve officials signaled they are prepared to quickly reverse last month's interest-rate cuts after concluding that borrowing costs need to be kept low for now. They also called inflation "disappointing," and some foresaw raising rates, possibly at a "rapid" pace once the economy recovers.

The threat goes beyond remarks by Chairman Ben S. Bernanke, who last week warned that policy will have to be "calibrated" over the next year to meet both inflation and growth objectives.

Bernanke and his colleagues are trying to avert the first recession since 2001. At the Jan. 29-30 meeting, Fed officials cut their 2008 forecasts for economic growth a third time, by about a half percentage point, and raised unemployment projections, according to the minutes.

At the same time, inflation is accelerating, spurred by higher energy and commodity costs, and officials are concerned about the public's perception of price pressures. "Participants agreed that continued stability of inflation expectations was essential," the minutes said.

"The central bank needs to monitor credit spreads and other incoming data for signs of financial market recovery and should be prepared to take back the insurance once the recovery becomes clearly established," Fed Governor Frederic Mishkin said in a Feb. 15 speech.

"When the time comes, when it's appropriate, we have to move in a timely way," San Francisco Fed President Janet Yellen said Feb. 12. Fed officials will be "thinking" about the last series of rate increases in deciding whether a faster pace would be appropriate, she said.

The reference to a "rapid" change in policy means a change from the "gradualist" approach of 2004 to 2006, when the Fed raised rates in quarter-point steps at 17 straight meetings, [chief fixed-income economist at Morgan Stanley, David Greenlaw] said.

Prepare to reverse engines full and get us out of here, Mr. Sulu.

Maybe the Fed can use some of this stuff.



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