Monday, May 07, 2007

Memo To Bernanke: It's Ok to Cut Too

I have reiterated ad nauseam on this blog that inflation is not a threat nor has it been at any time in recent memory. The Fed has successfuly snuffed out any chance of inflation and then some. Not long ago I mentioned as evidence the flat yield curve and the Tips spread. Not convinced? How about the two year treasury yield suggesting the fed is at least 75 basis points too tight. Another back of the napkin calculation taking Q107's nominal GDP growth of 4.7% and subtracting the Fed Funds rate of 5.25% causing a trend in the economy toward negative growth of almost 3/4%. Negative growth means monetary policy is too tight. In other words.............the only thing that can derail this goldilocks economy is an overzealous Fed targeting housing (succeeded) and employment (succeeding - I'm a little troubled by April's weak job number especially the downward revisions for Feb and March). Do they realize their policy has a lagging consequence? I'm starting to wonder. So as many are suggesting the Fed should declare victory on inflation and worry about growth again. I believe the Fed target rate should hit 4.5% by the end of the year. Bookmark this now and come back and see..........

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