The Fed's Confession

When it comes to admitting error, central bankers tend to emulate Benjamin Disraeli, who famously said "never complain, never explain." So it was nothing short of astonishing last week for Richard Fisher, President of the Federal Reserve Bank of Dallas, to confess in public that the Fed had blundered by keeping monetary policy too easy for too long in 2003 and 2004.

Speaking to bankers in New York, Mr. Fisher issued a mea maxima culpa that deserves wide attention: "In retrospect, the real fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been." As the nearby chart shows, a Fed worried about possible "deflation" moved the overnight interest rate it charges banks in June 2003 to an extraordinarily low 1% and kept it there for another year.

Mr. Fisher blamed this mistake on "poor data" that underestimated inflation, leading "to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country." In other words, the Fed itself is responsible for the current housing bust because its over-easy policy created a real estate frenzy that was bound to end once the Fed tried to regain control over inflation expectations.

From: Wall Street Journal