Fed Chairman Ben Bernanke, who celebrates his second anniversary in the job tomorrow, now faces a delicate challenge. If his policy is successful, the economy will escape recession, few additional rate cuts will be needed and, paradoxically, his actions to date may end up looking excessive.
"If we end up worrying about inflation later this year that could well be the good outcome for the Fed because odds are it will mean that the economy has stabilized," said Peter Fisher, a former Fed official who is now co-head of fixed income for money manager BlackRock Inc. "It may end up looking like the pre-emptive easing was unnecessary...but that's the point of taking out insurance against the downside."
If so, that would require the Fed to quickly reverse some of its rate cuts. "They acted aggressively on the way down; that suggests they'll act as aggressively on the way up," said Vincent Reinhart, a former top Fed staffer now at the American Enterprise Institute, a Washington think tank.
Inflation is likely to the greater threat in 2008-2009. It is time to acknowledge this.
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