I've quoted Paul Kedrosky's blog quite a bit but I couldn't resist this little bit of interest rate psychology he points out. If you follow the behavior of Central Banks across the world, then you notice that the European Union is reacting to inflation differently than the US Fed.The EU is trying to head it off, by raising rates, because their dominant constituency, Germany, went through a terrible inflationary period after WWI and they never want to repeat those mistakes.
At the same time, the U.S.'s historical nightmare is the Great Depression, where deflation (a decrease in price levels) and a credit crunch crushed the country for many years. So the Fed is willing to live with Inflation if it means no deflation.
Interesting how we try so hard not to repeat the mistakes of the past.
