Rear View Mirror Economics

Today, virtually everyone expects the Federal Reserve Open Market Committee to keep the federal funds rate steady at two percent. Attention will be focused on its sentiments about inflation in the policy statement, instead of structural problems besetting banking and halting growth.

Sadly, inflation hawks at the Fed have the Open Market Committee focused on inflation that has happened, and not on where the economy is headed or the constraints on monetary policy that will make effective Fed action difficult the second half of 2008.

Surging global demand and fleeting supplies of oil in non-Persian Gulf countries and restrictions on imports from the Gulf pushed up oil prices through June. Surging gasoline and grain prices, driven up by those forces and the U.S. shift to ethanol, pushed up inflation in the second quarter but those forces are abating. Moreover, there is no sign that inflation expectations have been built into wage setting and productivity gains remain strong.

Look outside. Oil and gasoline prices are falling, retailers face considerable difficulty passing along higher wholesale prices demanded by manufacturers and importers, and the economy. Pressures on global oil and commodity prices should ease the second half, and the realities of flagging demand in the U.S. market will require foreign purveyors of consumer goods in the United States and American manufacturers to hold the line on prices. Gasoline prices will ease, leaving only food prices as a source of concern.

The credit crisis could redouble its impact on the U.S. economy. Now credit card defaults are threatening the balance sheets of Citigroup and other big banks, bedeviled by slippery management, much as the subprime mess did over the last year.

Business credit will tighten. Non-Fannie Mae and Freddie Mac mortgages will get even scarcer, and half built suburban developments will start looking like a scene from an Armageddon movie. The Fed will likely be stuck with bad paper from Citigroup, J.P. Morgan and other money center banks and primary dealers in its “special facilities” for a long time.

Meanwhile, under our peculiar free trade arrangement with China, Beijing really sets U.S. monetary policy. Exempt by the Bush Administration from WTO requirements regarding currency policies, China purchases dollars and Euros for yuan in foreign exchange markets to keep its currency and goods cheap for Americans, and invests much of the proceeds in western bond markets. Capable of pumping up to $500 billion into U.S., European and other credit markets with the proceeds of this intervention, it will continue to determine the availability of liquidity and monetary policy.

The Fed statement will express concern about inflation and stress in credit markets and pretend the Fed can act to affect either one. The Fed would do better to start making access to its special lending facilities to a real cleaning up of banking practices on Wall Street, and advocate policies to unlink the dollar from the grip of Chinese monetary policy.

Sadly those most obsessed about inflation, such as Richard Fisher, earned their positions on the Open Market Committee putting in place the credit market conditions and free trade agreements that now so bedevil U.S. monetary policy. Solid Bush ideologues, they somehow think it will help to tighten credit to combat inflation in the rear view mirror, when the country’s banks are gripped in a crisis of confidence and the economy is headed south.

It is important to remember the physicians who bled George Washington during his dying hours were in step with the medical science of their time, as much as Fisher and his allies are with modern monetarism.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.





More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

April 24, 2018
Carl Boggs
Russia and the War Party
William A. Cohn
Carnage Unleashed: the Pentagon and the AUMF
Nathan Kalman-Lamb
The Racist Culture of Canadian Hockey
María Julia Bertomeu
On Angers, Disgusts and Nauseas
Nick Pemberton
How To Buy A Seat In Congress 101
Ron Jacobs
Resisting the Military-Now More Than Ever
Paul Bentley
A Velvet Revolution Turns Bloody? Ten Dead in Toronto
Sonali Kolhatkar
The Left, Syria and Fake News
Manuel E. Yepe
The Confirmation of Democracy in Cuba
Peter Montgomery
Christian Nationalism: Good for Politicians, Bad for America and the World
Ted Rall
Bad Drones
Jill Richardson
The Latest Attack on Food Stamps
Andrew Stewart
What Kind of Unionism is This?
Ellen Brown
Fox in the Hen House: Why Interest Rates Are Rising
April 23, 2018
Patrick Cockburn
In Middle East Wars It Pays to be Skeptical
Thomas Knapp
Just When You Thought “Russiagate” Couldn’t Get Any Sillier …
Gregory Barrett
The Moral Mask
Robert Hunziker
Chemical Madness!
David Swanson
Senator Tim Kaine’s Brief Run-In With the Law
Dave Lindorff
Starbucks Has a Racism Problem
Uri Avnery
The Great Day
Nyla Ali Khan
Girls Reduced to Being Repositories of Communal and Religious Identities in Kashmir
Ted Rall
Stop Letting Trump Distract You From Your Wants and Needs
Steve Klinger
The Cautionary Tale of Donald J. Trump
Kevin Zeese - Margaret Flowers
Conflict Over the Future of the Planet
Cesar Chelala
Gideon Levy: A Voice of Sanity from Israel
Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled Again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?