Legal Commentary

Fear Of Inflation, But Not Recession

By Big Tent Democrat

Yesterday, the Fed raised the interest rate banks pay on emergency Fed loans:

Financial markets were sent into a late-day spin after being caught off-guard by the Federal Reserve decision to raise the rate it charges banks for emergency loans. [. . .] The increase in the discount rate is just one of several moves the Fed is taking to reverse its unprecedented easing of monetary policy, but it is perhaps the most visible action taken so far. [. . .] [T]he move was widely seen as a key step in the central bank's move toward raising interest rates more broadly.

Why in heaven's name would the Fed take such an approach? Surely not a rational fear of inflation. Today, new inflation numbers were released - they show DEflation for the first time since 1982:

The price of a variety of goods, everything from rent to cigarettes, rose 0.2 percent in January. Excluding food and fuel costs, which tend to be volatile, prices fell 0.1 percent — the first decrease since 1982.

What could the Fed be thinking? Thursday's jobs report was not good:

Thursday’s report on jobless filings, in fact, rekindled worries that the labor market would be slow to bounce back. First-time unemployment claims last week were much higher than expected — 473,000, up 31,000 from the previous week.

The problem is not inflation, it is unemployment. How the Fed could see it otherwise is not clear to me.

Speaking for me only

Full post as published by TalkLeft on February 19, 2010 (boomark / email).