Laissez-faire: The Best Fed Policy Is To Stand Pat
 


     
   
 


By EconMatters
There was nothing really new out of the 2-day FOMC (Federal Open Market Committee) meeting on Nov. 1-2 without much indication to the widely anticipated further quantitative easing (QE3).  For now, the FOMC has basically decided to adopt a wait-and-see stance by maintaining its current policy including Operation Twist through 2012, and keeping the benchmark interest rate near zero to at least mid-2013.
Nevertheless, the more important (albeit coded) message is how much more pessimistic the Fed has gotten just within the past five months.  Below is the table from the Fed latest November economic forecast with the prior projection issued in June.

As the table illustrates, the Committee has significantly downshifted the GDP growth outlook, which suggests the Fed is as usual a step behind reality reacting to the summer market sell-off and the weak part of the year that started after Fed’s June guidance.
The problem is that by equating past market performance to the real economy, the Fed is once again risking doing too much, too quickly, at the wrong time, as in the case of QE2.  Just think about how much better the economy would have been without the QE2-inflated high energy, and commodity prices?  (For more detail analysis, see QE2: An Unmitigated Disaster?)    
Moreover, Fed’s inflation projection, in our opinion, is too optimistic–with a deflationary bias–given the global synchronized liquidity injection since the 2008 crisis, and the robust emerging markets future demand outlook. (For more analysis on inflation, see RIP Deflation )
The U.S. Consumer Price Index (CPI), including food and energy, already jumped 3.9% year-over-year in September, while the wholesale PPI (Producer Price Index) also surged 7% year-over-year.  Moreover, most of the recent economic indicators including trade and freight data are pointing to an… Read the rest
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