Fed won`t win any medals for early crisis response

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Bloomberg is out with its first story on the 2008 Fed transcripts and the headline is, `Fed failed to see Lehman`s fallout for the economy, transcripts show`

I read through parts of the Sept 16 transcript and the inability of the FOMC to grasp the gravity of what was happening is a bit of a shock. The problem with data-driven academics running the Fed is that they can`t make a real-time decision, they have to wait until it filters through the data. Later, once the market slapped the Fed in the face a few times, they did an good job but comments like this won`t inspire confidence in the Fed on main street:

`I don`t think we`ve seen a significant change in the basic outlook` said Dave Stockton, the Fed`s top forecaster two days after Lehman declared bankruptcy.

Similar take from Hilsenrath and the WSJ headline is: Fed’s 2008 Transcripts Show Struggle to Grasp Magnitude of Crisis

“I think that our policy is looking actually pretty good,” Fed Chairman Ben Bernanke said of the level of interest rates at a closed-door Fed policy meeting on Sept. 16, 2008

Author: Adam Button

Adam Button is the managing editor of ForexLiveâ„¢. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes there's an edge in knowing every tidbit of news. He was formerly the head of the markets team at the Canadian Economic Press and is a graduate of Ryerson University. Adam lives in Montreal, follow him on Twitter: @FX_Button.

2 Comments

  1. I had a friend who was a commodities broker. Not the brightest guy. But around the time Lehman collapsed, he ran around shouting at everyone to buy commodities, because the crash would cause the Fed to lower rates to zero and pump liquidity like crazy. Is it possible that the more the Fed reacts, the more people make economic decisions to game the Fed, and the less they engage in the appropriate portfolio of economic activities? Let’s take this example to the extreme, and assume everyone decided to buy gold, instead of paying for college, investing to research a new technology, whatever. Would not the economy become worse and slower, the sooner and more the Fed reacts?

  2. I disagree but people also assume the Fed doesn’t understand the magnitude of what’s going on. You can’t bury your head in the sand.

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