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Friday, June 27, 2003

Counting the Base Points Down

I've been so obsessed with the problems of monetary policy in the time of Great Depressions, that I'd completely forgotten it was Friday and time to check out what Roach has got to tell us going into this weekend. Well I find Brad has actually beaten me to it!! So I'm left with the leftovers, the part that reaches where others fear to tread, Stephen in naustalgic mood:

It was a very different era. In June 1958, the number one song in America was “Who’s Sorry Now” by Connie Francis. That same month the federal funds rate averaged 93 basis points. Fast forward 45 years and the Federal Reserve has taken its policy rate to a new post-Connie Francis low. By pushing the federal funds rate down to the long-forgotten 1% threshold, the Fed has rewritten the script of modern-day monetary policy. The fight against inflation is over. The battle against deflation has been joined................

In its inflation fighting days, financial markets learned never to doubt the Fed. In its deflation-fighting role, markets are giving the Fed the same benefit of the doubt. My biggest fear is that the Fed’s skill-set is asymmetrical -- that the central bank is much better in fighting inflation than deflation. If I’m right, that could spell a tough reality check for the US economy and for ever-optimistic financial markets. By the way, Connie Francis also recorded another song in 1958 that didn’t quite make it to the top of the charts. The title: “I’m Beginning to See the Light.” And I am told by one of the hippest members of our team that next week’s number one album on the Billboard charts is likely to be “After the Storm” by Monica -- whoever she is. What a world!
Source: Morgan Stanley Global Economic Forum

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