Memo to Fed: Quit dribbling and just do it!

M. Ray Perryman I first became a chronic "Fed watcher" about 25 years ago while writing my doctoral dissertation on U.S. monetary policy. There weren't many of us around back then. Now it seems that everybody's doing it.

I even went so far as to read decades of minutes of the Federal Open Market Committee meetings. That gives you some idea about the level of excitement in my life.

I have since moved on to more thrilling adventures (like watching grass grow and raising -- or being raised by -- five teenagers), but I still cast an occasional eye in the direction of the Federal Reserve governors.

Prior to this year, I was extremely critical of the Fed for raising interest rates during 1999 and 2000 when there was little evidence of inflation.

My position then was not very popular. In fact, in surveys of economists, it was not at all uncommon for me to be the lone dissenting voice.

It was almost sacrilegious to do anything but praise the Fed at that time. After all, the economy was booming and inflation was low.

My opinion, which everyone else has finally come around to, was simply that I could find no reason we would have seen rising prices even without the interest rate increases, and it is much easier to choke off growth with rate hikes (something like pulling on a string) than it is to stimulate the economy by lowering interest rates (something like pushing on a string).

For purposes of historical footnoting, what happened was that the Fed interpreted the inventory buildup in the latter part of 1999 as indicative of a massive overheating of business activity. In reality, it was nothing more than a reaction to the Y2K frenzy (remember that!) which many of us had predicted for years.

In any case, the Fed began aggressively lowering interest rates early in 2001 and has now given us seven rate cuts in eight months. This approach is roughly equivalent to closing the barn door after the cows are out, but at least it is a move in the right direction.

I do think, however, that the Fed is once again going about things the wrong way.

It's time to get on with it! Last week, for example, we again saw the widely leaked and anticipated 0.25 percentage point rate cut (to 3.5 percent on the funds banks lend to one another), and a statement to the effect that things were still weak.

The result is that market participants immediately begin to speculate about further rate reductions in the next few months. In fact, major stock indices dropped following the announcement.

The dilemma the Fed now faces is that they are lowering rates to encourage consumers and businesses to spend money, but by hinting at additional cuts down the road, they are simultaneously providing incentives to wait.

At this point, they already know they're going to ultimately take rates down to about 3 percent. They need to just go ahead and do it -- today, if possible. Say to the markets: "Here it is! This is what you get! Now, quit trying to second-guess what we're going to do, and get on about your business!"

By continuing to dribble out the decreases, the Fed is heightening uncertainty and creating an enormous barrier to new investment.

If you lower the price of a car I want today, but tell me you'll likely lower it again in a couple of months, I will rationally tend to delay my purchase. When you're talking about the debt costs of billions of dollars in investments, the temptation to sit on the sidelines is enormous.

The Fed needs to quit messing around and just do it! Of course, the last time the Fed listened to me ... On second thought, I'm not sure the Fed has ever listened to me.

Dr. M. Ray Perryman is president of The Perryman Group (www.perrymangroup.com).

http://houston.bcentral.com/houston/stories/2001/09/03/editorial4.html

-- Martin Thompson (mthom1927@aol.com), September 06, 2001

Answers

Hurry and wait - just like the Army.

-- Big Cheese (bigcheese@mutimax.net), September 07, 2001.