Forward Guidance FAIL

The Federal Reserve is supposed to be making it clear to governments and businesses and individuals that they won’t raise interest until we start to see a more equal balance between employment and inflation.

Right now inflation is very low and falling, and unemployment is very high. The Fed should make clear that they’re willing to allow core inflation as high as 4% in order to get unemployment down closer to 5-6%.

Providing this certainty of low interest rates to economic actors is another way of saying “Go borrow money now to fix your bridges. Go borrow money now to build that apartment building. You can be sure that rates will stay low.”

That is not the message that people are getting:

[Northampton County] Council had planned to refinance a $9.9 million bond from 2006 and add the savings to an extra $11.4 million in debt, so 18 of the worst bridges in the county can be repaired and work can be done at Gracedale, the county nursing home.

But after financial adviser Robert Fuller laid out the numbers, council decided to follow his advice to “step aside” until July 18, when Fuller said the bond interest rates would be more settled.

Bond interest rates spiked “pretty smartly” last week, Fuller said, in reaction to Federal Reserve chairman Ben Bernanke‘s statements a few days earlier about winding down the central bank’s $85 billion-a-month bond-buying program.

Speak Your Mind