The US, and world economy needs the Fed to act today, and markets seem to be indicating that they believe that the Fed will act. This is the same situation we found ourselves in during the fall of ’08. Growth is barely even anemic, and markets are indicating that they expect future NGDP growth to slow. Headline inflation has subsided, and the recent “major” blip in core inflation has turned out to to be a fluke — inflation is still running below the Fed’s implicit target. Combined with that, markets have roundly given the finger to S&P, and world troubles are pushing people into dollar assets, exacerbating the problems that we are experiencing with elevated money demand.
The Fed needs to do something bold today, before we fall off the cliff again, just like in October/November 2008…we’ve seen when happens when passively tight monetary policy causes the economy to limp along…once the buildup of balance sheet problems, falling asset prices, and increased demand for money reaches a head, the tipping point comes quickly and painfully. However, this time we’ll likely experience actual deflation, which will likely become a deflationary trend due to the timidity of our central bank.
So Bernanke, please give the hawks the finger for now, and do the right thing. The future of the US economy desperately needs it.