-- Posted Sunday, 8 April 2007 | Digg This Article | Source: GoldSeek.com

Rick’s Picks

“Phenomenally accurate forecasts” 

In his latest commentary, Pimco’s Paul McCulley argues that the Fed should shift its inflation “comfort zone” higher in order to better manage the risks of both inflation and deflation. The comfort zone is currently 1%-2%, but maintaining price stability within that range forces the central bank to react “asymmetrically” to the ebb and flow of deflationary risk, he says. When inflation gets down toward the lower end of the range, the Fed is forced to ease aggressively to keep the economy from slipping into deflation. However, when inflation approaches the high end of the range, the central bank will typically react with only measured tightening. Raising the comfort zone to, say, 1.5%-3%, says McCulley, would allow the Fed to respond in a more symmetrical way to changing risks.

He further develops this idea by examining it in the context of the Fed’s role in managing not just inflation, but inflationary expectations. Although one would surmise that McCulley believes the Fed capable of succeeding at both, at least in theory, and therefore of keeping the economy on a stable monetary path, he separates himself from the pack of Fed devil-worshippers by alluding to “skinny risk premiums borne of hubric [sic] presumptions about the Fed’s ability to fine-tune the business cycle.”

Why McCulley fails to even acknowledge the far greater risk of financial-asset deflation is a mystery to me. Granted, in the context of a $14 trillion U.S. economy, the percentage-point shift he is advocating for Fed policymakers is not insignificant. But compared to the global financial economy, which includes derivatives markets with notional values aggregating into the hundreds of trillions of dollars, price inflation in the goods-and-services sector is a relatively piddling concern.  By splitting relative hairs in discussing CPI-related problems, McCulley would appear to be yet one more economist who seems more concerned about a 20-cent increase in the price of a carton of eggs than about the ongoing, horrific slide in real estate values. However, it is the extent of the latter that ultimately will determine whether the U.S. economy sinks or swims in the coming months, not the policy nostrums of wonks engaged mainly in the counting of angels on the heads of pins.  

***

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Sunday, 8 April 2007 | Digg This Article | Source: GoldSeek.com

Previous Articles by Rick Ackerman

© 1995 - 2019

Live GoldSeek Visitor Map | Disclaimer