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April 21st, 2009

Why The Fed Should Battle Inflation Now

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Last week we asked whether you thought it was a good or bad idea if the Fed conducted regular press conferences to keep taxpayers abreast to their latest strategies and ideas. Author Andy Kessler seems to think it’s a smart idea — especially when it comes to the Fed’s upcoming battle with inflation (emphasis added):

My suggestion: Lay out a blueprint for pulling the money back in. Tell Wall Street and Main Street exactly what you are going to do, and when and how your plan will be triggered. When economic activity rises by 2 percent, you are going to increase interest rates by 1 percent and “retire” another $500 billion. That will stop second guessing and congressional quibbling. And I’d get it out quickly, this summer.

Like many, Kessler sees the dark clouds of inflation on the horizon. As the Federal Reserve cranks out money at an astonishing rate, the monetary base has increased by $1 trillion in the last six months as the Fed prints cash and buys Treasuries:

When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn’t need all that cash sloshing around. Is runaway inflation our next crisis?

In the Fed’s defense, the economy isn’t functioning — frankly it’s quite the opposite. But the majority of economists and Fed Chief Ben Bernanke alike see an economic turnaround sometime around 2010. Regardless of when the recovery occurs, Kessler’s question remains: how will the Fed put the toothpaste back into the tube?

Getting all that toothpaste back into the tube will require the skills of a surgeon and the moxie of a middle linebacker, and someone deaf, dumb, and blind to congressional meddling. And worse, this is something that has never been done before.

Putting the toothpaste back into the tube will be a task like no other. Yet this task could provide the perfect opportunity for the Federal Reserve to explain the process and the strategy to the people it will affect most — those of us on Main Street.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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