...And Fed Is Back to Accommodative Stance

A Fed board member and two presidents of regional Federal Reserve banks have spoken about the need for the Federal Reserve to tighten the monetary policy (i.e. raising the Fed funds rate) aggressively even without the overt sign of inflation (for that matter, without overt sign of recovery).

This morning, the Fed trotted out the Federal Reserve Atlanta's president Dennis Lockhart, who said there is no rush for the Fed to begin to tighten the monetary policy.

No rush to tighten, Atlanta Fed's Lockhart says (9/30/09 MarketWatch)

"WASHINGTON (MarketWatch) -- There is no rush for the Federal Reserve to begin to tighten monetary policy, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on Wednesday.

""I think it may well be some time before a comprehensive exit need be under way," Lockhart said in a speech in Mobile, Ala.

"There has been much speculation in financial markets and economic circles about the U.S. central bank's so-called "exit strategy" -- when and how it will start winding down the stimulus and liquidity measures implemented to battle the financial crisis that took hold a year ago."

Well, that speculation has been fueled by none other than the Fed officials. First, it was last week's FOMC meeting (September 22/23): the Fed said it would continue to keep the rate low for a long time to assist the recovery. Then on Friday last week, Kevin Warsh, a Fed board member and former Morgan Stanley banker who worked in the President's Working Group on Financial Markets (aka Plunge Protection Team), wrote an Op-Ed piece on Wall Street Journal strongly indicating that the Fed would move aggressively even if the signs of inflation were not evident. Then came Richard Fisher, president of the Dallas Fed yesterday, basically saying the same thing as Warsh in a plainer English. He was joined by the Philadelphia Fed president Charles Plosser, who delivered the speech in Pennsylvania saying "The Fed will need courage. I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels."

Then today the Atlanta Fed president is sounding like a voice of reason by saying "Assuming stable inflation, I would like to see more evidence of private activity in the economy before advocating change in the Fed's overall monetary-policy stance."

Is the Federal Reserve playing "bad cop, good cop" routine?

The stock market doesn't seem to know what to think of these utterances by the Federal Reserve officials. Chicago PMI number registered a fall instead of expected increase, and that overwhelmed the good news of 2nd quarter GDP (final reading) revised to decreasing only by 0.7% (annualized) instead of -1.1% consensus.

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