The Fed’s critics have complained very loudly since Ben Bernanke began lowering interest rates last Fall. They argue that low interest rates encourage more borrowing and consequently more spending. And that low interest rates depress the the foreign exchange value of the dollar. They say all of the above are driving inflation higher and point to exploding food and oil prices worldwide as evidence.
For his part, Bernanke has said that risks to economic growth “outweigh” the risks of higher inflation. That is why he had continued to lower interest rates despite the threat of inflation. (until last week anyway)
Just today, the Bank for International Settlements published a schizophrenic report in which they argue that the end of the credit boom poses more serious threats to the world economy than the “consensus view seems to expect. At the same time, inflationary forces…could prove unexpectedly strong and persistent.” Translation: growth is slowing more quickly than people expect while inflation is accelerating more quickly than people expect.
What is Ben Bernanke to do? Since his job is simultaneously to avoid recession while protecting against inflation, and right now there’s evidence he faces both problems, he’s in a difficult spot. This is because the policy prescription to fix anemic economic growth will tend to increase inflation. But the prescription to fight inflation will suppress economic growth. You might say Bernanke is between a rock and a hard place. Or up shit creek.