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Monetary policy in a lifeboat?

 


Thus far, Governor Lisa Cook has been winning in the courts.  She remains a Governor and so a member of the board of the Federal Reserve Board, entitled to a part in the deliberations of the September meeting, yesterday and today. 

That fact is a small victory for sanity in an insane moment and is worth celebrating. 

Also, we hereby note that going into the meeting the general expectation has been and so far as I know remains that there will be a smallish cut in the Fed rate, (probably 25 basis points, or one-quarter of a percent),  BUT that it will be a "hawkish cut". The Fed will issue a statement about the cut, saying sternly that it is NOT the beginning of a series of cuts but a one-off and that the rate of inflation is a grave concern. 

For review: Fed policy commentators have long since used the language of "doves" and "hawks" long used by military-policy pundits.  In the case of the Federal Reserve, the old foe is inflation and interest rates are a key weapon.  So interest rate cuts are almost definitionally dovish and a "hawkish cut" is something of a literary paradox. Nonetheless, they happen and one may have just happened as you read these words. 

At a very basic level, you may interject the question "WHY is an interest rate cut inherently dovish?" Consider what inflation MEANS. It is too much money chasing too few goods. Consider the verb in that sentence, "chasing". Money that is being hoarded away isn't chasing goods, and isn't contributing to inflation.  Money that I use to buy US Treasury bonds is about the next step down from money inside a pillow case on the hoarded-away ladder. As rates go up, THAT hoarding becomes more attractive, and money is withdrawn from the marketplace where it would otherwise be chasing goods. 

"Too much money chasing too few goods" produces price increases as the too-muchness of the money shows up in the demand curve for the goods, and higher number for the Y axis on such graphs, i.e. prices. 

I was going to use a complicated lifeboat analogy here. But as work progressed on this post I dropped it off.  Just for the halibut, though, I'll keep the headline and the photo of a classic Hitchcock movie. 

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