Tags: Blinder | Fed | Downgrade | S&P

Blinder: Fed Growth Downgrade More Serious Than S&P

Thursday, 18 Aug 2011 08:22 AM

Economist Alan Blinder says the downgrade to worry about came from the Federal Open Market Committee, which downgraded its near-term assessment of the U.S. economy sharply, not from Standard & Poor’s.

“Since the Fed's code of conduct mandates the use of Fedspeak instead of English, let me offer a quick translation: Yikes! Things have sure deteriorated quickly!’" Blinder writes in The Wall Street Journal.

"The Fed expressed its alarm in two ways, both remarkable," says Blinder.

The first was Fed chair Bernanke's willingness to push ahead despite a level of discord almost unknown in the consensus-bound FOMC. The second was the policy innovation of the Committee more or less promising to maintain the current rock-bottom federal funds rate for almost two more years.

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"In so doing, the Fed violated one of the most revered canons of central banking: Always keep your options open," says Blinder. "No one knows what might happen between now and June 2013—not you, not me, and not the FOMC."

"A booming economy by, say, Christmas 2012 doesn't look too likely right now, but it could happen. And if it does, the Fed won't want to keep the federal-funds rate near zero. So why risk the loss of credibility?"

“The two-year interest-rate commitment is based on a wing and a prayer.”

Bloomberg reports that St. Louis Federal Reserve Bank President James Bullard, who was the first Fed policy maker to urge the round of bond purchases that started last year, said the central bank isn’t signaling a third stimulus program with its commitment to keep rates near zero through mid-2013.

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Economist Alan Blinder says the downgrade to worry about came from the Federal Open Market Committee, which downgraded its near-term assessment of the U.S. economy sharply, not from Standard Poor s. Since the Fed's code of conduct mandates the use of Fedspeak instead of...
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2011-22-18
 

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