Pick a problem: Inflation, deflation, or stagflation?

Challenges for Monetary Policy in a Globalized Economy - Richard Fisher Speeches - News & Events - FRB Dallas: "To be sure, movement in the fed funds rate, or even no movement at all, may have an immediate psychological effect and influence expectations for future monetary policy action. But the act of changing or not changing the fed funds target rate, in and of itself, has no immediate effect on the economy. Like a good single malt whiskey, the ameliorating or stimulating influence kicks in only with a lag.

The lag time necessary for inflation to respond to policy is especially long. As a policymaker discharging our dual mandate, I am always mindful that in providing the monetary conditions for employment growth, we must not also sow the seeds of inflation that will eventually choke off the very employment growth we seek to encourage. You do not have to be an inflation 'hawk' to recognize that would be a Faustian bargain."

The stock market isn't all greedy hedge fund managers. It's also municipal pension funds, little old ladies, and 401k/IRA accounts (mine AND yours). So while Fisher says that the Fed's mandate doesn't include making Wall Street happy, we have to recognize what a huge impact the stock market has on individuals, municipalities, and corporations.

At the same time, inflation is an enemy of the poor. The government consistently understates inflation (so-called "core" inflation excludes volatile categories like food and energy), so people relying on government benefits find that their inflation-adjusted benefits don't go as far anymore. Inflation gives rise to stories of pensioners eating cat food because they can't afford people food. Anyone can find their purchasing power eroded by inflation, but the poor are disproportionately harmed. Inflation punishes savers by eroding the value of their savings, and rewards borrowers by eroding the value of the principal they have to repay.

In the 70's, we tried to have it both ways - we wanted to avoid the pain of recession, but then complained about inflation. Ultimately, Volker had to tighten interest rates to bring inflation down from teens-percent; by some counts, the resulting recession cost Carter the election. The moral of that story, it seems, was "pay now, or pay later." I think of economic imbalances as being like an economic bought of influenza; you can suck it up and take bed rest today, or keep working 60-hour weeks and risk dying of walking pneumonia. The Fed seems to think popping rate-cut pills and taking a couple liquidity injections will cure this particular bug.