The answer is yes, of course. A weak economy needs lower interest rates to keep it going. There are some risks, however. This is the other side of the argument.
Meltzer, who is finishing the second volume of his history of the Federal Reserve, warns that Bernanke is risking a disastrous replay of the 1970s, when high oil prices fueled double-digit inflation.
Every time the Fed started to tighten and unemployment jumped, chairmen G. William Miller and Arthur Burns lost their nerve. They lowered rates to boost job growth, and inflation inevitably revived, causing a vicious price spiral.
The Fed let the disease rage for so long (in the 1970s) that it took draconian action by chairman Paul Volcker in the early 1980s to finally defeat inflation. The price was a deep recession, with unemployment hitting 11% in 1982.
"The mentality is the same as in the 1970s," says Meltzer. "'As soon as we get rid of the risk of recession, we'll do something about inflation.' But that comes too late."
The point is that if the Fed eases too aggressively inflation will rise out of control and cause the economy to become more unstable with even more frequent recessions and bear markets as from 1968 to 1982 when the stock market failed to appreciate for about 15 years.
What to do? It is crucial to maintain a flexible investment strategy. Buy and hold is likely to produce below average results.
More on http://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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