Thursday, November 23, 2006

Fed monetary policy is neutral, not restrictive

Just to be clear, the current Federal Reserve monetary policy with the Fed funds target interest rate at 5.25% is still neutral, and not restrictive. It is above the middle of the neutral range, but certainly not at the level where it chokes off economic growth. Nonetheless, I read quite a bit of commentary that strongly suggests that monetary policy is "restrictive." The whole point of the recent rate hike campaign was not to "slam on the brakes", but merely to remove the bulk of the excessively easy money that was fueling inflationary pressures.

Besides, mortgage rates are still quite low, so it is somewhat misleading to say that the Fed rate hikes themselves were the cause of the slowing of the housing sector. High prices and excess supply relative to demand are the probable culprits and market forces will cause adjustments regardless of Fed policy.

-- Jack Krupansky

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