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Wednesday, July 06, 2016

''Confidence in Federal Reserve Economic Management is, Right Now, Lacking''

Brad DeLong:

''Confidence in Federal Reserve Economic Management is, Right Now, Lacking'': Correct, IMHO, from the very sharp Narayana Kocherlakota [Three Antidotes to the Brexit Crisis]. Now perhaps his successor Neel Kashkari and the other Reserve Bank presidents not named Charlie Evans might give him some back up?
The one thing I do not like is Narayana's "Granted, there is a risk that such steps will spook markets by signaling that the Fed is concerned about the state of the U.S. financial system." That sentence seems to me to misread market psychology completely. As I see it--and as the people in markets I talk to say--right now markets are fairly completely spooked by their belief that the Federal Reserve is unconcerned, and takes that lack of concern as a sign of Federal Reserve detachment from reality. Narayana's following sentences seems to me to be highly likely to be the right take: "I'd say the markets are already pretty spooked" and "By demonstrating that it is paying attention to these obvious signals, the Fed can help to bolster confidence in its economic management".
Let me stress that, at least from where I sit, that confidence in Federal Reserve economic management is, right now, lacking. ...
For eight straight years now the Federal Reserve has been more optimistic than the markets. And for eight straight years now the markets have been closer to being correct. And yet the Federal Reserve still believes that it "can't be led by what the market thinks" and has "got to make our own analysis"? Why? ...

    Posted by on Wednesday, July 6, 2016 at 11:10 AM Permalink  Comments (38)


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