Having cited the Wall St. Journal blog’s prediction that there would be no dissenting votes in the Federal Open Market Committee on the next expected-to-be-large Fed Funds target rate cut, I should note that there was in fact one dissenting vote in the “emergency” meeting earlier this week, by the about-to-retire St. Louis Fed President William Poole. Regrettably Poole didn’t object to the size of the cut, which reduced the Fed Funds target by a whopping 75 basis points to 3.5% from 4.25%, only to its being made before next week’s regularly scheduled FOMC meeting. The market is forecasting a further cut next week.

Using standard analysis (the Taylor Rule), what Fed Funds target would be appropriate? It depends on the relative weights one puts on inflation (the core CPE inflation rate is currently above the supposed 2% ceiling to the Fed’s “comfort zone”) versus the “output gap” (actual real GDP is below its potential level as estimated by the Congressional Budget Office). According to the Taylor Rule chart in the St. Louis Fed’s Monetary Trends, assuming 50-50 weights, as of Q3 2007 a target of 2% PCE inflation was calling for a Fed Funds rate of around 4% (the actual rate was then 5%). By very standard analysis, then, the Fed has already overdone the rate-cutting. (Personally, I'd prefer a lower inflation target and a lower weight on the output gap, but that's beside the point here.)

Why did the Fed over-react? Apparently Bernanke was anxious to bolster stock prices. As the headline to Jay Hancock’s Baltimore Sun column put it, “Fed caves to Wall Street in moment of panic”. Or as the headline to Caroline Baum’s Bloomberg.com column put it: “The Greenspan Put Is Dead. Long Live the Greenspan Put.”