Don't Fight The Fed

Filed in archive on April 27, 2005

So it is inflation stupid? Fed Governor Donald Kohn gave a speech last week that is quite revealing of at least his thinking. It seems he has inflation in his crosshairs, housing be damned.

But, in the same vein, we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households. In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur. It is through such actions that we aim to achieve our objective of economic stability.