Tuesday, August 09, 2011

Liquidity and Inflation

Well, according to the grand Expectations Theory of the Term Structure of Interest Rates, longer-term interest rates should have fallen on news of the Fed's decision today-- and they did. However, if the market expected economic growth and inflation to outweigh the liquidity effect, we'd have seen long-term yields rise instead of fall. Basically, the market has acknowledged that rates will be lower for longer than it thought before, but it doesn't see the possibility of increased growth. This isn't a good thing.

That Bernanke doesn't have more support on the Board of Governors for Really Useful Policy is an unforced error by Obama. Republicans haven't helped by filibustering candidates and such, but Obama could always recess appoint someone to the Board of Governors who knows you don't fight a house fire with a garden hose. Judging from the last couple weeks, I think Ken Rogoff probably wishes he could be on the FOMC; he'd have no problem getting bipartisan support.  What's the point of having a central bank if it's not going to do its job adequately?  That's an argument of free bankers that I think has real merit. The data don't say the Fed (or the ECB) has done a good job. If it's batting .100, maybe it's time to find another batter.

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