At least I hope so. Greg Mankiw points out that the Fed already seems to have let interest rates fall:
Robert Barro emails me:Did you know that the average Fed Funds rate for August was 5.0%? That is, the Fed already cut rates by a quarter point--it just did not announce it.He is right: The intended Federal Funds rate is still at 5.25, but the actual rate was 5.02 in August.
In the preceding 13 months, the Fed missed its target by no more than a single basis point. But then in August it misses by 23 basis points. Why? Is this an unannounced change in the target, or is the Fed getting worse at hitting its target?
Let us hope very much that the Fed is just foolin' us. Now would not be a good time to learn that monetary policy is getting more difficult to target.
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This seems to be a common thread with the Fed. Every strategy they use, people eventually adapt to (cf. rational expectations), so its job becomes an exercise in surprising people.
Remember, first the fed was interested in the price level, then it found it had to control inflation to accomplish anything, then it had to target the *rate of change* in inflation.
Here, it's having the "phony fed funds rate" as its latest trick. Go fig.
Posted by Person | September 13, 2007 1:14 PM