Fed Policy

I've read some economic news today that has me puzzled.

First came a (completely unsurprising) report that consumer prices jumped by their largest margin in 17 years, a 4.1 percent rate for 2007. That's a sizeable jump over the 2.5% rate for 2006 and the roughly 2.1 percent rate we've been experiencing on average over the past fifteen years.

Second, I saw a report from the Federal Reserve's Atlanta office that says that the economy is still growing, but very slowly. So the good news is no recession (at least not yet).

But some economists are still expecting—nay, begging for—a large interest rate cut when the Fed meets again at the end of this month. Personally, I also expect the Fed to cut interest rates, as it has become increasinly clear to me that the Fed is far more concerned about slowing growth than about inflation.

Here's the kicker, though: it's not slow economic growth that's hurting people right now. It's the jump in prices. In fact, it could be argued that the jump in prices is causing the economic slow-down, as consumers are cutting discretionary spending in order to be able to pay for food and fuel.

The problem here is that cutting interest rates will spur economic development (whew! good news for businesses!) but cause inflation to grow at an increasing rate, making things even harder for consumers who are already struggling.