I just read an op-ed piece that lamented the poor Fed having to make a decision. On the one hand the Fed says it wants to stave off inflation. That would require higher interest rates. On the other hand, the Fed is worried about turmoil in financial markets worsening if they raise interest rates.
What is a good Fed supposed to do? Geez guys -- try doing your job. You goosed the economy and you caused inflation. Hmm. No choice here. Not reversing policy means we get even more inflation and eventually a recession. Reversing policy weakens the economy for a while but makes possible a return to normalcy.
The longer the Fed waits to do the right thing, the more it creates uncertainty about the future. But what about the financial crisis? Won't tight money cause a meltdown? I doubt it. Yes, higher interest rates on top of high interest rates are never a good thing. But if people believe the Fed is doing the right thing for the right reasons, that should create a floor and possibly an easier return to stronger growth.
Either way it is risky. It's not like all this is surprising. We have known for a very long time that Fed interventions to stimulate the economy cause risks. But then most drinkers understand that one more drink can be risky too. Somehow we never really learn from our mistakes.
