"We have nothing to fear but fear itself."–FDR
The Fed can now fear inflation or it can fear a worsening credit crisis. The conventional wisdom is that it can only fix one.
As things stack up now, problems in the financial industry are not going to be helped much by lower rates. The Fed can keep its "free money" discount window open and hand out cash like candy on Halloween. Since lower interest rates are not being passed on to consumers because banks don’t want to take the risk, lowering rates does nothing for the man on the street.
Inflation is hurting the modest citizen. He can’t afford gas, food, and his mortgage. Higher interest rates mean little to him. Rising prices mean everything.
The conventional wisdom is that the Fed does not have the guts to make a bet about inflation, and that it will do nothing with rates. That assumes Bernanke balances inflation and the credit crisis and finds they weigh about the same. But, they don’t.
The Fed is faced with helping bank executives or the average man. There are no populists on the agency board, but all of the members can count. Bank executives are outnumbered in the equation by about a million to one. The Fed can help the many or the few.
It is an election year. It would be cynical to think the Fed wants to help voters over fat cats.
But, Bernanke may be having trouble paying the $5 a gallon to fill up his limo.
Douglas A. McIntyre
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