Stupidity and Ignorance on Capitol Hill Our congressional leaders showed their true colors during th
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The Bernanke Fed is trying to be forward-looking by anchoring policy to a forecast and by using inflation expectations as a guide. Any change in the fed funds target rate from current levels likely will result from the Fed having to defend its forecast for growth and inflation. The forecast thus is the anchor for policy, while inflation expectations, derived from surveys and spreads in the bond market, are the bridge between current policy and the forecast.
The Fed minutes released yesterday suggest more balanced risks to growth, with business confidence, non-residential investment, exports, and a tight labor market likely to offset the ongoing adjustment in the residential sector. That fact that the economically sensitive Dow Jones Transportation Index has reached record highs into the teeth of $75-a-barrel crude oil prices sends a powerful message about growth.
With headline inflation elevated, commodity prices in the stratosphere, the dollar weak, and inflation-linked bond spreads above their 10-year moving average, there would seem to be upside risks to the Fed鈥檚 2008 inflation forecasts, which may require higher short rates to achieve. However, this may be a 2008 event instead of a 2007 reality.
In the meantime, it would be helpful if the congressional leadership resisted lowering structural productivity to a rate below the Fed鈥檚 reduced forecasts by way of totally unnecessary and growth-retarding tax hikes on capital and labor.
Sadly, the U.S. shift toward economic populism and tax hikes, and away from free trade, is coming at a time when most of the rest of the world is moving down the Laffer curve by cutting tax rates and removing obstacles to commerce.
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