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Tuesday, December 06, 2005

Fed Governor Olson: Fed Unlikely to Tighten Rates Too Much

Federal Reserve governor Olson gave a speech today on rural development. After the speech, he said he wasn't worried about over tightening:

Olson Isn't Worried the Fed Will Raise Rates Too Much, Bloomberg: Federal Reserve Governor Mark Olson said he isn't concerned the Fed will raise its benchmark interest rate too much because the central bank can respond quickly to changes in the economy. ''I don't worry about that,'' Olson ... told reporters after a speech in Sioux Falls, South Dakota. ''The economy doesn't typically move so rapidly that it would get away from us.'' ... Olson said the Fed has ''an opportunity to look at the economy continually,'' including between policy meetings, and because of that ''we have the ability to respond very quickly.'' ... Olson said that price measure, also known as ''core'' inflation, ''remains muted.'' ''We need to be continually watchful,'' he told reporters. Olson... said the decision facing Fed policy makers at next week's meeting is the extent to which higher prices are ''passing through into core inflation, and the extent to which we may consider removing that accommodation,'' or continuing to raise the benchmark interest rate. ...

It sounds more and more as though Federal Reserve members believe that inflation is coming under control and they are waiting for confirmation of this from new data over the next few months before stopping the campaign of incremental rate hikes. But any signs of inflation will be met with hawkish eyes.

I want to question one thing in these remarks. There are considerable lags between the time a policy is put into place and the time the policy takes effect, e.g. as long as a year and a half before the peak impact of the policy is felt on GDP and the effects of policy shocks can persit for as long as three years. Recessions can occur much faster than this and the idea that the Fed can always respond in time to catch any downward movement in activity fails to recognize the length of these lags and the uncertainty we have about them (see Jim Hamilton at econbrowser for more on this). I find the attitude that 'The economy doesn't typically move so rapidly that it would get away from us,'' surprising from a Fed official.

    Posted by on Tuesday, December 6, 2005 at 12:34 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (5)

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