The Fed’s job: Fighting inflation, not avoiding recessions

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Sure he’s the competition (although this is from Robert Samuelson’s Washington Post column, not his Newsweek one), but that doesn’t mean he can’t be right:

For the past three months, the consumer price index has increased at an annual rate of 4 percent. “Core inflation” (all prices minus food and energy) is at 2.7 percent for the past year. Core inflation now exceeds the Fed’s presumed target of 1 to 2 percent. Increases in the fed funds rate (from 1 percent in mid-2004 to 5.25 percent now) aim to slow the economy just enough to cut inflation by making it harder to raise prices and wages.

Abandoning that goal prematurely, just because the economy might slip into recession, risks creating bigger problems. To be sure, Fed actions operate with ambiguous lags. But once inflationary expectations rise, long-term interest rates would probably follow. Even a mild wage-price spiral would threaten more — not less — instability. Low and stable U.S. inflation has underpinned America’s economic success and a stable global financial system. We ought not jeopardize them.

You’ve heard it here before: I don’t think the Bernanke Fed is going to be in any kind of hurry to lower rates until it’s convinced that there’s no inflationary threat. Which, given the long and variable lags with which Fed policy operates, could mean bad news for the Republican nominee in next year’s presidential race.