|
 or
at least one brief shining moment, stock markets rallied smartly
Tuesday after hearing some monetary advice from Dallas Fed president
Robert McTeer.
While many
credited the jump in consumer confidence for this morning's market
rebound, the real reason for a 150 point Dow Jones lift was McTeer's
remark that "sooner or later, as the economy gatsanehers momentum,
and gets stronger, adjustment will have to be made. But, I am
not in a hurry." [Italics mine.]
McTeer also
cited declining inflation, rapidly growing productivity, and significant
unused capacity in an economy now just moving from recession into
early recovery. Alone among FOMC members, McTeer uses real-time
financial and commodity market indicators to guide his policy views.
He also follows monetary trends. Most important, he does not believe
in the Phillips curve trade-off between falling unemployment and
rising inflation. Nor does he believe that monetary policy should
set limits to the rate of economic growth.
Ever since
the Fed's last meeting a week ago, stock markets have been falling
over fears of rapid-fire Fed interest-rate hikes that would drain
much needed liquidity from the nascent recovery. Business debt ratios
are still high, and credit availability has not yet recovered for
the vast majority of U.S. firms. Therefore, stock markets correctly
worry that premature Fed tightening would damage recovery prospects.
Bush economic
advisor Lawrence Lindsey shares these financial worries. In an interview
on CNBC's America Now, Lindsey asserted that the $6 trillion
loss in financial wealth from the stock market's deflation generated
a sizable negative shock to the economy. While Lindsey foresees
economic recovery, he is quite cautious in his assessment of the
future and believes that additional tax-cuts would have provided
an important recovery cushion.
Both stock
and bond markets are forced to deal with the reality of Phillips
curve-type Fed thinking. The FOMC's latest decision to shift their
balance of risk policy assessment from recession to neutral removes
any doubts that the central bank has been weaned off its Phillips
curve model. The very nature of the so-called policy bias sets up
the discredited trade-off
between inflation and growth. This despite the fact that even the
most optimistic forecasts of a 4% recovery rate this year would
still leave the economy far short of its 7% historic recovery pace.
At least on
the surface it would appear that the Fed has learned little and
changed little from its massive over-tightening mistake in 2000.
Indeed, with personal tax rates coming down, and business tax costs
on the decline from the congressional decision to legislate a 30%,
3-year cash expensing bonus for business depreciation, the Fed should
be increasing liquidity to accommodate tax-induced investment
and transaction-demand increases. If inflation is defined as too
much money chasing too few goods, then tax-cuts to promote additional
goods should be met with monetary expansion, not restraint.
It is rumored
that at least one prominent supply-side thinker is now under consideration
for an open Fed seat. If so, this would be the White House's first
really solid central-bank appointment.
Meanwhile,
it remains unlikely that Alan Greenspan will serve out his full
term as Fed chairman through 2004. To promote non-inflationary growth
and monetary reform, why not Bob McTeer?
|
