FOMC - rock and a hard place
The FOMC has been warning about downside risks to growth for months now. More recently they’ve added the upside risk to inflation. Monetary Policy cannot address both of these problems at the same time because the conventional cure for each is in the opposite direction. The FED, in trying to manage the credit crisis, has perhaps made their decision making process more difficult as their focal point of view has widened. Of late, FED speakers often throw fiscal policy initiatives into the mix, pressing for more control over fiscal policy in an effort to effectively apply monetary policy. Tomorrow’s FOMC minutes should be interesting in that the downside risks to growth stem primarily from an out of control banking system and the pressure it is exerting on the entire economy. The FED’s policy response to the collapse of the housing sector, in hindsight, was easier credit. Easier credit has likely exacerbated inflation though the FED talks primarily about food and energy prices, not consumer credit. There is virtually no chance of a rate change tomorrow with the twin problems of inflation and tanking growth. Indeed, the FED is without a policy tool having used up rate cuts to address the housing sector/bank crisis only to find that looser policy could not address the morass the banks made. It could be argued that all those eases from the FED made leverage less expensive, helping to drive up commodities prices. Yup, it’s a mess.