Monday, April 14, 2008

The Fed is Stuck

Props go out to Beth Stevens for telling me about this editorial in the WSJ. The article talks about how the heads of central banks have realized that the depreciation in the dollar is a bad thing. So what are they going to do about it? Rather than fixing the underlying policy problems like runaway inflation because of lax interest rates, they are just going to "jawbone," which means try to talk the value of the dollar up. This won't work. It's easy to look at the U.S.'s balance sheet and understand that we are trying to inflate our debt away. Only real changes will work.

Money quote from the editorial:
If central banks really want to put a floor under the buck, the Federal Reserve will have to change its weak-dollar policy.

Such a change will run into enormous opposition in Congress, among homebuilders and on Wall Street – all of which want the Fed to inflate its way out of their current credit woes. (John Makin makes the case for the inflation solution here.) We only wish life were that easy. The Fed's aggressive easing in the last year may already have done more harm than good.