Richard Posner has weighed in on the chances the Federal Reserve will act as promised and use its tool kit to enact an exit strategy. His answer is: probably not.
The main problem will be that, if trends continue, the Fed may be faced with the need to raise rates while employment is at the highest levels seen in generations. That will be enormously politically unpopular. And this time around we’ll have the Barack Obama rather than the Ronald Reagan in the White House.
At the Atlantic, he writes:
For a time, as in 1979-1982, high interest rates, engineered by the Fed to stop inflation, may coexist with both high inflation and high unemployment–an immensely politically unpopular combination, which helped Reagan beat Carter in 1980. Partly because of Volcker’s personality, partly because of Reagan’s ideology, the Fed was allowed to crush inflation at the cost of a severe recession in the early years of Reagan’s presidency.
If history repeats itself, I have no doubt that Mr. Fisher will vote to pull the trigger, because he is a famous inflation hawk. But will Bernanke, or his successor if he is not reappointed? And a majority of the Federal Open Market Committee? The Fed does not operate in a political vaccuum. It has no constitutional independence from the political process. It is unpopular in Congress, and Democrats are not as hawkish about inflation as Republicans are.
I think Dallas Fed president Richard Fisher is overly optimistic about the Fed’s willingness to “pull the trigger” regardless of “political inconvenience.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.