The New Fiat Money

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Forgive us, but are we the only newspaper that finds it a bit — what’s the right word here? — circular for the Fed to make a megillah out of publishing its forecasts in respect of interest rates? The idea seems to be that the Fed is going to publish not only its own forecast of interest rates but the forecasts of its individual policy makers. It reminds us of the wiseacre who asked Freddie the Fixer which nag was going to win the classic known as the Galloping Mile. Freddie answered him with his famous tautology: “I haven’t decided yet.”

It strikes us that Freddie’s answer would have been a better, a more forthright one than for the individual “policy makers” of the Fed to be dispensing their predictions of what they will do. The idea, announced Tuesday, seems to be that publishing the individual forecasters’ predictions of what they will do “could” — that’s Reuters’ word — “give the sluggish economic recovery a bit more lift by better aligning bets in financial markets with the consensus view at the central bank.”

Reuters tried to explain it by posing this question: “Why did the Fed make the move, and why now?” It answered its own question this way: “The central bank cut its conventional tool for speeding up or slowing down economic growth — the fed funds interest rate — to near zero three years ago. But that wasn’t enough to pull the economy out of a harsh recession.” It went on to note that the chairman, Ben Bernanke, has since turned to what Reuters characterized as “a series of unconventional measures to spur economic growth.”

The first, Reuters explained, was to undertake “a massive expansion of the Fed’s balance sheet by buying $2.3 trillion in bonds to drive down borrowing costs further. That process came under withering criticism within the United States and internationally for risking inflation and weakening the dollar. While the Fed has continued to tinker with its balance sheet, replacing maturing securities with longer-dated bonds, its next policy move has been to give investors and the public more clarity about the thinking of its top officials.”

Quoth Reuters: “The decision to publish interest rate forecasts won’t commit the Fed to providing more easy money. But in practice, it could demonstrate that most policymakers don’t expect the first rate hike until farther into the future than was previously thought. It will also help the Fed out of the bind it created in August when it replaced a vague pledge to hold rates at ultra-low levels for ‘an extended period’ with the more specific vow to hold them there until at least mid-2013.”

“That step,” Reuters reports, “was aimed at reassuring markets that the Fed wouldn’t turn on a dime and start to raise interest rates if economic data pointed to an improved outlook over a few months.” But the British news agency reports that “many analysts” reckon the forecasts “will make clear that the majority of policymakers don’t expect the first rate hike to come until 2014 at the earliest.” Mr. Bernanke, it adds, “has made greater transparency a hallmark of his tenure” and warns: “Further changes, such as publishing explicit inflation targets, may be in the offing.”

* * *

This is the new fiat money — a currency backed with hot air. Wouldn’t it be wiser for the Fed to stop its infernal yakking? What is its yakkety-yakketa doing for the poor saps forced by American law to accept its scrip? We tried to make this point when the Fed departed from long standing policy — and long-time central banking best practice — and announced that the chairman, Ben Bernanke, would begin holding quarterly press conferences. We quoted a one-time deputy governor of the Bank of England, Sir Ernest Harvey, as counseling silence among central banks. “To defend ourselves is somewhat akin to a lady starting to defend her virtue,” he famously told Lord Keynes. Mr. Bernanke’s latest demarche is more like a lady trying to defend her virtue by signing up for the Moulin Rouge.


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