Monetary Policy in a Disinflationary World

We are pleased to bring you the latest economic outlook from Goldman, Sachs & Co. to assist your credit union in its ongoing efforts to stay abreast of market conditions that could affect your members' financial lives.

 
 

We are pleased to bring you the latest economic outlook from Goldman, Sachs & Co. to assist your credit union in its ongoing efforts to stay abreast of market conditions that could affect your members' financial lives.

  • With their alteration of the ''balance of the risks'' statement, Fed officials signaled a fundamental shift in monetary policy. Inflation is now too low, rather than too high. As a result, the long-standing policy of opportunistic disinflation is no longer appropriate. Instead, Fed officials want the economy to grow fast enough to put pressure on resources and push the inflation rate higher.

  • This means that policy will now be reactive rather than preemptive. The implication is that Fed officials will not tighten monetary policy for a long time. In this respect, the market response since the FOMC meeting has been appropriate, with the yield curve flattening significantly over the past ten days.

  • We believe that Fed officials should go even further and precommit to keeping the federal funds rate low until the core PCE* deflator rises to 2% on a year-over-year basis. Although this would require some sacrifice in terms of policy flexibility, the benefits would include a stronger anchor for keeping inflation expectations in positive territory and an even flatter yield curve.

  • The latest inflation indexes bear out the Fed's concern, with core consumer prices flat for the second month in a row in April and up only 1% at an annual rate over the past six months. With activity data also indicating that the postwar rebound is still more forecast than fact, the probability of a 50-basis-point rate cut by mid-year has risen further.

  • A dividend tax cut of some form is all but a done deal now that the US Senate has approved a bill containing a truncated exclusion. Significant differences between the House and Senate tax bills still need to be ironed out, and that will take time. In our view, the final bill will more closely resemble the Senate version since this is where the votes have been harder to muster.
 

 

 

May 26, 2003


Comments

 
 
 
  • Interesting, but I don't know that I agree with the content. I haven't noticed the yield curve flattening in the last ten days, but I don't know when this article was written. I don't agree that the Fed is becoming reactive instead of proactive either. I also don't understand what a "core PCE deflator" is and it wasn't defined anywhere in the article. Perhaps I should know that, but I don't. I also didn't know what "GSFCI" stood for - I am assuming something like Goldman, Sachs ------ Core Inflation. Pam Tucker ptucker@pccu.com
    Anonymous
     
     
     
  • Very timely and appropriate. Thank you.
    Anonymous