Saturday, February 04, 2006

Ye gods, monetary policy is stupid...or evil...take your pick

This article on Marketwatch caught my fancy:

NEW YORK (MarketWatch) -- U.S. stocks ended lower Friday, capping a week of losses for the market after the Federal Reserve left open the possibility of further interest-rate increases, with a solid January jobs report only serving to build the case for higher rates...

n Friday's action, the January employment report left little doubt in most investors' minds that a March Fed rate hike is on the way.

"The main impetus behind the selling was the employment figures," said Al Goldman, chief market strategist at AG Edwards. "Even though we created 193,000 new jobs, which was less than consensus, the unemployment rate falling to 4.7% points out that the labor market is very tight and this has conjured up concern the Fed may not stop at 4.75% on Fed funds but maybe it will go up to 5%."

Goldman said a tight labor market worries the central bank as companies have to offer higher salaries to attract workers, which leads to wage inflation: "And the Fed is in business for one reason only, and that is to try and control inflation."

We're not saving money; its not clear whether or not we're consuming beyond essentials, but if we were, wouldn't it make more sense to have a policy that encouraged people to save, if curbing inflation were really the objective? Are we going to put enough people out of work so that we use less oil? So if enough of the freeze to death, will that make the economy boom?

Making matters even more absurd is the fact that the unemployment numbers are more or less "cooked," and don't reflect "discouraged workers." The discouraged workers aren't going to get encouraged- they've already likely fallen off the radar. So one wonders just what they'll be encouraged to do in the face of higher interest rates.

Why should there be a false choice between employment and inflation, "controlled" by higher interest rates? It's like using leeches...

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