What the Fed giveth, it may soon have to taketh away
2 hours, 3 minutes ago
Looking at Wall Street on Tuesday, you could easily believe that
the mortgage crisis and credit crunch so much in the news lately
had evaporated over night. The market rallied 336 points, its
biggest one-day gain in nearly five years, after the Federal
Reserve slashed short-term interest rates by half a percentage
point, meeting the optimistic predictions.
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The move should give a jolt to an economy weighted down by housing
and credit woes. It should reduce some borrowing costs for
individuals as well as companies. But it's more a temporary
catalyst than an enduring remedy. Enjoy it while it lasts.
Though it's impossible to say what will happen next, one thing is
clear: Federal Reserve Chairman Ben Bernanke does not have the
luxury to repeatedly slash rates that his predecessor, Alan
Greenspan, once did. The threat of inflation makes sure of
that.
Greenspan had the good fortune to run the Fed at a time of low
energy prices and surging worker productivity. He realized that
this made it possible to stoke the economy through low rates
without stoking inflation.
But good times have a way of bringing on their own demise when
leaders refuse to face changing realities and unchanging truths.
Inflation is a problem in part because of countries such as China
and India. After two decades of growth, they are buying more stuff
from oil and steel to iPods and memory chips helping to push up
prices. Their workers are also demanding higher wages to produce
the goods and services that make their way to Western
nations.
The problem is one of our own making, too. As Americans have grown
accustomed to good times, they've bought bigger homes and bigger
cars. They've borrowed and consumed more, sometimes stretching
themselves to the limit. Their government, meanwhile, has not only
failed to encourage prudent polices on personal savings, energy
consumption and other matters, it also has gone on its own
borrowing, spending and tax-cutting binge. By juicing the economy
when it didn't need it, government limits its ability to do so if
and when the need arises.
For these and other reasons, let us hope that a recession is not in
the offing. Neither the Fed nor the nation's political leaders have
much ammunition to use against it.
In fact, the Fed might soon have to start raising rates to focus
more on inflation as it did in the late 1970s and early '80s,
setting the funds rate, its key economic lever, at an
inflation-whipping (and economy-wrecking) 20%. It is now
4.75%.
Greenspan said in a Monday interview with USA TODAY that
inflationary pressures will force the funds rate back into double
digits in coming years.The technical term for that is:
ouch!