Saturday, May 22, 2010

You would think that an editorial that's subtitled "If the Fed won't tighten up, we'll pay the price" would present a case for why the Fed should abandon the current policy of quantitative easing in favor of something more contractionary. That's what I expected when I turned to the last page of this week's print edition of Barron's, but that's not what found. Instead, Tom Donlan fills most of the page with a story about bonds issued three decades ago, the point of which appears to be that things don't always turn out as you expect. But saying, in short, "shit happens" isn't a compelling argument in favor of any particular policy, much less the one that the editorial piece ostensibly advocates. Does journalism get any lazier?

The article isn't completely free of argument. There is an inkling of one towards the end, where he writes "Wall Street doesn't have a money market; its interest rates reflect Fed policy, as do Main Street consumer prices." Now this isn't really an argument, but it's the closest Donlan gets to the kind of writing one expects in a piece advocating a Fed policy change. The dependent clause -- "as do Main Street consumer prices" -- is an assertion. And it's not false; Fed rates and the state of the economy as a whole are correlated. When the economy overheats, the Fed raises interest rates, and there's a recession of some magnitude. The Fed eventually responds by lowering rates, which lets economic growth resume. That's the standard picture.

From there, though, it just gets childish:

It's easy to imagine that inflation is irrelevant to a U.S. economy that's posting the lowest increases in consumer prices in 44 years. But "imagination is funny; it makes a cloudy day sunny," as Johnny Burke wrote for Frank Sinatra in 1940.

Sunny days of low inflation won't last.

And it would be easier for us to imagine that what he says actually matters if Donlan had bothered to make an argument. Low inflation won't last. So what? When inflation becomes palpable to Fed policy makers, they'll raise interest rates. But if there's no sign of inflation now, what reason is there for Fed policy to become contractionary now? Hello?

UPDATE: The New York Fed chairman disagrees with Donlan too.

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