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Columnist Conversation
re: RIMM
6/25/08 4:53 PM ET

Re: Nike
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Financials Peter
6/25/08 3:59 PM ET

The Un-Asked Question About The Federal Reserve
6/25/08 3:39 PM ET

Who you gonna believe, the Fed or your lying eyes?
6/25/08 2:37 PM ET

The Fed
6/25/08 2:35 PM ET

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Howard Simons
The Un-Asked Question About The Federal Reserve
6/25/2008 3:39 PM EDT
The last week has given us two important illustrations about government and society. The first is Barack Obama's decision to opt out of public financing of his campaign. The second is the ongoing monetary mess.

Briefly, the problem with money in politics is not how campaigns are financed; no, the real problem is influencing government decisions is so profitable. So long as the federal government has arrogated asset allocation powers to itself, money will find its way into the system to influence these decisions.

Emerging case in point: Restrictions on commodity speculation. Once the government decides who and who is not a bona fide player in the markets, interested parties will find it worth their time and money to make sure they are classified as bona fide.

Now on to the Federal Reserve. They will be observing their 100-year anniversary in 1913, which makes them 95 years old now. Most 95 year-olds have learned a thing or two in their life, such as whether they know what they are capable of doing or not. The Federal Reserve has yet to demonstrate they know the outcomes of their actions.

Disagree? If they raised rates today, would they or anyone else be able to tell you what the impact would be over the next year on inflation, employment, interest rates, exchange value of the dollar, asset prices or anything else? History says "no." There are no deterministic outcomes to monetary policy.

There are unintended consequences, though, little things such as the Great Depression of the 1930s, the Great Inflation of the 1970s and whatever is going on today. Toss in the stock bubble of the 1990s and the real estate bubble of this decade for good measure.

My rule of thumb is simple: If you don't know the consequences of your actions, do not undertake them. Period. In this case, let's go to a rule-based system of monetary policy instead of trying to use the blunt instrument of money to influence everything in the world. Monetary policy operates with long and variable lags, which is a fancy way of saying you do not what what is going to happen or when.

My reading of the FOMC Statement today can be summarized as, "Uh oh. Now what do we do?" That is followed by some gibberish on growth and inflation. At least Greenspan's language was amusing.

Until we stop giving power to those incapable of using it, we will keep getting these problems over and over again. Einstein's definition of insanity was doing the same thing and expecting different results. Is this where we are collectively?

Position: None

Tim Melvin
Who you gonna believe, the Fed or your lying eyes?
6/25/2008 2:37 PM EDT
Fed: downside risks to growth diminishing Warren Buffett:Everything connected with construction and with consumer, I see weakness, and if anything, it's accentuating a little bit. Headlines: new home sales and prices fall in May Fed: Inflation pressure to moderate later in year Buffett: Inflation really picking up Headlines: Wheat jumps on Midwest problems. General Mills raises prices. Energy demand to increase 50% over next two decades. If there is a worse job in finance or government than Fed Chair right now I do not know what it might be. They cannot lower because of inflation pressures, and they cannot raise because the economy is too weak. The only choice left is futile deception

Position: short idiotic fiscal policy and therefore bonds

Steve Birenberg
The Fed
6/25/2008 2:35 PM EDT
The statement doesn't sound particularly hawkish to me relative to recent market speculation. I'm with Bill Gross that Fed Funds aren't going anywhere anytime soon.

One thing that confuses me is the concept that the Fed must raise rates to cool inflation. It's the Phillips Curve I guess but with GDP growth at nil I don't see how that works. Thus, the flow through must be that raising rates will firm up the dollar which will cool commodities and thus keep inflation in check. But is the correlation between the Fed funds rate, the dollar, and commodity prices strong enough for that strategy to work? Is it a strategy that makes sense given the risks to growth from higher rates and less exports.

I'm all ears and eyes if anyone wants to comment on the rates vs. inflation concept.

Overall, it seems to me that the Fed is on hold given the need to balance the risk to growth (regardless of what their statement says it exists and has risen recently) and higher inflation.

Whether the Fed on hold is good or bad for the stock market is also something that I am having a hard time figuring out.

Position: None mentioned

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