July 17, 2008
Between a rock and a hard place
This is a common phrase to describe a dilemma in decision-making where whichever option is taken, something bad happens. Some say the Federal Reserve is in such a situation. Describe it for us. Listen
Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"Well, of course the Federal Reserve really takes the brunt of the effort to stimulate the economy when it's in dire straits, and to stimulate the economy typically the big ammunition the Fed has is to lower interest rates. So clearly the economy is still sputtering right now, so there would be pressure for the Federal Reserve to lower interest rates so that people can go out and buy a lot of those homes that are on the market and buy cars and stimulate production. But the consequence of that - the negative consequence of that - is that, I think it's clear that part of the reason for higher oil and gas prices is due to the Federal Reserve's efforts to lower interest rates, which have led to a lower-value dollar. Of course, oil is priced in dollars, so as the Fed has pushed down interest rates, oil prices have gone up. So that's the dilemma the Fed is in. On the one hand, they perhaps want to consider lower interest rates. On the other hand, however, they know if they do that, that's going to send probably oil and gas prices even higher and spark even higher inflation. So this is why we pay those big bucks to those folks on the Federal Reserve Board, because there's not a clear answer. The Fed will have to choose what to do, and whichever way they go, there's going to be some negative effect."
Posted by Dave at July 17, 2008 08:00 AM