Inflation: just say no

Tim Duy sums up the difficult position the Fed is in:

The world as it is, alas, is far from perfect. It is simply easier to lower than to raise rates. And I suspect this is especially the case this time around, as even if inflation pushes higher a tepid economic environment – the best that even Fed officials see emerging on the other side of this slowdown – makes meaningful rate increases politically difficult. And, as I argued last time, any rate increases are effectively off the table for the foreseeable future, as Bernanke cannot offset the fiscal stimulus he supported and largely designed.

It is increasingly obvious that the Fed is in a no-win situation. The best case scenario for the Fed is that nominal wage growth is kept in check by a deteriorating labor market. This will help contain inflation expectations and prevent a more serious 1970’s type of environment. But overall, Jim Hamilton is correct; they are unable to both contain inflation and prevent a significant economic downturn



I am, as econbloggers go, extremely forgiving of the Federal Reserve. I think what is obvious in hindsight is rarely so clear in prospect, and that our Fed chairmen of the last few decades have in general done a remarkably good job of balancing output and inflation.

It is time, however, to turn off the taps. Recessions are bad, but not nearly as bad as things will be if the Federal Reserve squanders nearly thirty years of hard-won credibility on inflation in a futile attempt to prevent oil scarcity from reducing output.