Industrial Insight

Fed instability… | April 22, 2013

http://www.bloomberg.com/news/2013-04-22/is-the-fed-s-medicine-really-poison-.html

Is the Fed’s Medicine Really Poison?

By Caroline Baum Apr 22, 2013 9:12 AM CT

Just think about that for a minute: What the Fed needs to do in order to achieve its macroeconomic objectives will create instability in financial markets. There’s more:

"On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis —- a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives."

Damned if we do, damned if we don’t. Other Fed officials have warned about froth in asset markets, but none to my knowledge has been as forthright in describing the Fed’s life-saving medicine as systemic poison.

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