Greenspan's Inflation Is Bernanke's Problem

The monthly commentary on The American Enterprise Institute for Public Policy Research is always a good read. It gives you a good "Big Picture" insight.

With the benefit of hindsight, it is possible to say that the Fed has tightened too slowly at 25 basis points per meeting since the tightening began in June 2004. That judgment follows simply from the fact that, in the process of moving the fed funds rate from 1 percent to 5 percent at a rate of 25 basis points per meeting, the Fed has failed to contain inflation within its target ranges.
It may be fair to suggest that an understandable fear of hurting asset markets on the part of Alan Greenspan, Chairman BernankeÂ’s predecessor, allowed inflation pressure to build to a point where the Bernanke Fed faces some painful choices.
Through it all, markets should understand that the Fed will be unwavering in its determination to bring inflation back into the 1 to 2 percent target range. That is because the primary lesson of macroeconomic experience over the past half century has been that lower and more stable inflation go hand in hand and are associated with higher growth--and probably with gains in productivity and wealth. In effect, lower and more stable inflation reduces the economic energy that has to be devoted to managing the risks associated with higher and more volatile inflation and thereby enables higher and more stable growth as productivity improves.
Even if the Fed decides that it needs to slow the economy to growth rates well below potential in the 3 to 3.5 percent range in order to contain inflation, such measures should be viewed as an investment in maximizing the average growth rate over the next several years. Once the Fed achieves its inflation target and as markets understand, once again, the FedÂ’s commitment to low and stable inflation, the growth of output and employment will be considerably higher than they would have been had the Fed simply allowed inflation to rise unchecked.