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Economists: Fed Should Have Been More Aggressive in ’04-’06

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By Greg Robb

RISMEDIA, March 2009-(MCT)-The Federal Reserve should have paid more attention to rising oil prices earlier this decade and been more aggressive with monetary policy, according to a report by an influential group of economists released Friday.

“The boom in oil prices coincided with booms in two other asset markets- credit and housing- and the combination of strength in all of those markets should have been a warning sign,” the report concludes.

The paper criticizes the Fed’s slow quarter-point rate hikes that stretched over two years starting in 2004.

“Perhaps the Fed should have recognized that slow, perfectly predictable rate hikes were not imposing adequate restraint,” it said.

The study was written by Ethan Harris of Barclays Capital, Bruce Kasman of JP Morgan Chase and two academics and released at a forum sponsored by the University of Chicago Booth School of Business and Brandeis International Business School.

Janet Yellen, the president of the San Francisco Fed Bank, disputed the conclusions of the report. She said there were no signs of wage inflation even though oil prices were rising. Without rising wage demands, the Fed was able to follow an easier monetary policy, Yellen said.

But rate hikes are certainly not on the table with the economy still very weak, the financial sector shattered and deflation the biggest worry. Oil prices are no longer sky-high, but the economy may be so weak that it is not getting any benefit from it.

“Any boost to spending from falling oil prices will be more than welcome in the current circumstances,” Yellen said.

At the moment, inflation is now below desirable levels and any drop in inflation expectations would be unwelcome, Yellen said. “My hope is that inflationary expectations will remain similarly well-anchored now, serving to stabilize core inflation,” Yellen said.

Earlier this month, the Fed for the first time released its projection for longer-run inflation of around 2 percent. Many analysts think this could be viewed as an inflation target.

Yellen said the projections should be useful in pinning down inflation expectations.

© 2009, MarketWatch.com Inc.
Distributed by McClatchy-Tribune Information Services.

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