BEN BERNANKE and his Federal Reserve Board monetary policy colleagues must have had the words of Ronald Reagan ringing in their ears when they met last week, “Don’t just do something, stand there.” Which is about all they could have done, given the fact that the slowing economy calls for an interest rate cut to prevent the housing-market slide from turning into an avalanche, and the inflation indicators call for a boost in rates. So best to do nothing, and continue the current “pause” while promising to remain alert to inflation should the Fed’s guess that it will soon abate prove incorrect.
The Fed is to be forgiven its decision not to choose between the inflation doves, who see a recession around the corner and want to keep rates from going up, and the inflation hawks, who see rising labor costs generating inflationary pressures. The numbers are on the side of the hawks. There are lots of ways to measure inflation, all of them flawed, but all until very recently pointing to an annual rate of around 3 percent, well above the Fed’s “comfort range” of 1 percent to 2 percent. That means that when we correct the Fed’s current short-term rate of 5.25 percent to subtract out inflation, the real rate of interest is a mere 2.25 percent. That isn’t high enough to qualify as an inflation-fighting rate, even given the scare created by a weak economic activity report from the Philadelphia Fed.
