The Washington Post has a good editorial on the Fed
that explains a lot. Yes, it's been worried about the credit crisis, but it's always worried about something, and that has kept the U.S. central bank from significantly raising interest rates for years. "No worry of inflation," it has claimed. Guess what? The Fed's definition of inflation comes with a pair of blinders:
Every American who drives or shops for groceries understands this [that prices of food and energy are soaring], except at the Fed, where they bow before something called "core inflation." This is a way of measuring prices without including food and energy, and so we are supposed to take comfort that "core inflation" is rising at only a 2.3% annual rate. Yet it is the Fed-induced price spike in food and energy since last August that has Americans in an uproar and Congress in a panic that may yet produce major policy blunders.
In other words, the Fed ignores some of the most potentially volatile basic commodities that there are.
In some sense, I can understand the impulse. When you want to see a trend, it's a common enough practice to eliminate wild variations to get an overall pattern and not go off on a quest after what is only a transitory effect. By the time you change policy, and maybe pass legislation, the variation is over, or moving in another direction, and you've committed yourself to a course of action that will now have an effect other than what you wanted.
But we're talking about oil more than doubling price - possibly tripling - and food prices that, experts say, are going to be up for a long time, possibly a decade. Changes this high, or that will go on for that long, are more than transitory, because they have a transforming effect. It could be enough to shift the economy from one steady state into another - an older term for the more fashionable "tipping point" phrase that represents the same well-established engineering concept.
One big factor in the price rises, and the overall shakiness of the economy, is the weakness of the dollar, and, as my feeble brain understands it, that results from pumping money into the system and keeping interest rates too low for too long so those who have money aren't screaming at you that they cannot borrow even more money cheaply enough.
Maybe borrowing is over rated. Yes, it's convenient, and, yes, it can make certain types of transactions possible. But there are a lot of companies with enough profits to invest sizable amounts into their new ventures. It's called capitalism, folks - you make capital and then you invest/risk big chunks of that to get to the next place. Those who want assured profits perhaps should be apprised of the nature of the endeavor. Real wealth comes from long-term investment and building, not from squeezing every possible dollar out of the business.
Instead of appeasing the loud cries, the Fed governors should grit their teeth and do the hard work that is necessary. Yes, people will scream and call for their heads, but they took the job, and it's their duty to take the actions necessary for the long-term health of the country. When you hear from person after person wondering whether they will be able to afford to heat their homes this winter, it's not healthy.
Labels: economics, Fed, inflation, interest rates