March 29, 2007


Hard line on inflation adds to fears: The Fed chief's stance underestimates the risk of waiting too long to cut interest rates, critics say (Molly Hennessy-Fiske, March 29, 2007, LA Times)

The primary sources of inflation -- rising energy and commodity prices -- are not easily controlled by tight monetary policy, critics say. If the Fed waits too long to cut interest rates and stimulate growth, unemployment could start rising and slip beyond its control too.

By holding interest rates at current levels, as it has since August, the central bank risks recession while failing to significantly lower inflation, some analysts say.

The Fed "always focuses on inflation risks until the growth story is so blindingly obvious that it can no longer be ignored.... The longer this lasts, the bigger and quicker will be the easing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicting that the Fed will cut " very aggressively" this year when the slowing economy becomes more obvious.

But markets being largely irrational, the psychology that the Fed creates does matter and the belief that the Fed is being hawkish on inflation is important.

Posted by Orrin Judd at March 29, 2007 6:52 AM
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