The convergence of a slowing economy and rising inflation may present Bernanke with his greatest challenge yet. “Greenspan had this tailwind that he didn’t have any situations like [that convergence]. There’s no clear path as to what the Fed should do [now],” said Justin Fox ’87, business and economics columnist for Time magazine.
Yes, I am so inarticulate when speaking aloud that college newspaper reporters have to finish my thoughts in print for me. (Thanks, Tatiana!) Just to elaborate: The “tailwind” Alan Greenspan had at his back was a quarter-century-long decline in long-term interest rates combined with a slide in commodity prices. Sure, Greenspan contributed to the interest-rate decline by helping convince investors that serious inflation was a thing of the past (or the very distant future) in the U.S. But he also was lucky to be Fed chairman when he was–after Paul Volcker had done the brutal work of killing inflation by nearly killing the U.S. economy and before the long post-inflation honeymoon had run its course.
Bernanke faces a much more difficult situation. Long-term interest rates can’t go a whole lot lower, and commodity prices appear to be in an up cycle. Plus, investors and lenders have been so lulled by Greenspan’s good luck and deft touch that they don’t seem fully aware of how ugly things could get as Bernanke tries to fight persistent inflation in a slowing economy.
Or something like that. As I’ve said before, I’m not a real Fed watcher. Don’t have the attention span for it. My attention this morning, in fact, soon drifted to a fascinating Princetonian article about the huge reaction a column in Monday’s paper by Princeton economist Uwe Reinhardt (headline: “Bomb Iceland Instead of Iran”) had gotten in Iceland. When I worked for the Daily Princetonian, I think it’s safe to say that no one was reading us in Iceland.