In a previous blog post I highlighted the absurd pretending game by leading Fed officials that interest rates are somehow something which are not affected by Fed policy, even though Fed policy like focuse on the setting of interest rates. The latest Fed official to do this are William Poole. In a panel discussion by the Western Economic Association in San Francisco this Wednesday [July 6 2005] quoted in Prudent Bear’s latest Credit Bubble Bulletin, Poole comments the issue of whether the Fed should take asset prices into consideration as well as consumer prices when determining monetary policy something which several European central banks, particularly the Bank of England and to a lesser extent also the ECB and the Swedish Riksbank, have started to do:“If I could just add to that. I absolutely agree [With Milton Friedman's rejection of that policy] .And one of the reasons I take that position – I’m really a hardliner on this. Let’s suppose that the Fed – as you would want with any good policy instrument – had perfect control over asset prices. I think it is incompatible with a market economy to have a government agency setting asset prices that are meant to allocate capital.”
News flash, Mr. Poole: Short-term debt instruments are assets. And the Fed has complete control over their prices[ i.e. short-term interest rates] and it also has very strong control over long-term interest rates and strong influence on stock prices and house prices. So if you -quite properly- reject government control over asset prices this means that you should reject the very institution you work for.