Wednesday, July 22, 2009

Bernanke's Exit Strategy

Seeking to calm fears about future inflation, Ben Bernanke wrote an op-ed in the Wall Street Journal, which essentially simply stated that if the FOMC wanted to tighten policy, they can. Well, thank you for telling us what most of us already knew.

However, the point is that while no one doubts that the Fed can tighten policy, the really relevant question is will they dare to do so. As I pointed out in a previous post, inflation will reappear long before "full employment" or "closed output gap" will be reached, meaning that the Fed will have to either allow inflation to get out of hand or allow a 1937-style double dip depression.

But either way, it won't make the problems created by previous inflation go away. It will only affect when and in what form they will be manifested.


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