Global Fudge

Am I the only one around who has the distinct impression that there is something missing in the Economist's coverage of the global economy these days? Belonging as I do to a generation of economists that was brought up on the staple diet of balance, analysis and fair play that was to be found in its pages, I don't remember the Economist ever having a repution for reluctance to take risks with its judgements. But recently they seem to have succumbed to a severe case of 'sitting-on-the-fence-ism'. The latest case in point: yesterdays reading of the Fed Open Market Committee decision. For the Economist the question apparently seems to revolve around whether or not to 'keep the powder dry' on the next rate cut. The astute observer, however, cannot fail to notice that the underlying weakness and 'the probability of an unwelcome substantial fall in inflation' (which, of course, they say is minor) points offer a different reading. The phase of conventional monetary policy may be reaching its end, what now seems to be on the agenda is an opening of the 'unconventional toolbox'. The first indication of this can be found in the attitude to the 'softer dollar'. There certainly will be more to come. We should take the Fed's determination not to fall into the Japan trap seriously. And they are surely only too aware that another 50bp cut is not going to achieve what a drop of 475bps already hasn't. So more will undoubtedly be to come in the days that lie ahead. What a pity the Economist couldn't bring itself to offer a clearer reading of this novel situation: or have I just been spoilt by the risky calls offered by the likes of Stephen Roach, Paul Krugman and Brad Delong? Risky calls that get to look better with every passing day.

BE WORRIED but don’t panic. That seems to be the message that Alan Greenspan and his colleagues are keen to get across. The chairman of the Federal Reserve, America’s central bank, is clearly anxious about the timing and strength of the long-awaited upturn in the world’s largest economy. But the Fed decided, unanimously, to keep interest rates unchanged when it met on May 6th. Few can have been surprised by that: at 1.25%, rates are at their lowest for more than 40 years, and so close to zero that the Fed wants to hold on to what remaining room for monetary manoeuvre it still has, just in case.

What will have given some observers pause for thought was the Fed’s decision to shift its assessment of the future risks for the economy. It now judges the risk of further economic weakness to be greater than that of an upturn in inflation. This so-called “bias” is closely monitored because of the clues it offers about the likely movement of interest rates in future. Shifting the bias towards weakness does not mean interest-rate cuts are on the way; but it does mean rates are more likely to remain flat—or, in certain circumstances, even to fall—than they are to rise.

..........the logic of the latest statement was impeccable, if tortuous. The balance of risks about the economic outlook, said the statement, was “roughly equal”. But the Fed thinks there is only a small chance of inflation gathering pace. Thus the overall balance of risk is tilted towards further weakness...........At this stage in the economic cycle, such uncertainty should be a thing of the past. The recession ended in 2001 and the American economy has now been growing for several successive quarters. The recession itself was one of the mildest on record. But although America is still expanding faster than most industrial economies, it has lost a good deal of the momentum seen at the beginning of 2002. Which is why Mr Greenspan is having to keep his fingers crossed.
Source: The Economist
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