Inflation VS. Deflation Inside the Fed

The WSJ has a somewhat troubling front page piece on the current debate raging inside the Fed over what poses the biggest threat to the US economy. It seems as if our fearful economists who control the US money supply can't agree over what to fear most: inflation or deflation. Here I thought the fed was busy genially discussing the nuances of a zero percent vs. .25% fed funds target. It turns out, they can't even diagnose the underlying economic issues that need to be targeted. It's as if our leading economists have turned into an episode of "House" where Dr. Foreman is arguing over some treatment that will kill the liver to save the heart, while Thirteen thinks it's a brain tumor. Yet every episode of "House" neatly resolves itself when the brilliant Dr. House has some sort of epiphany that leads him to discover that the patient was just pregnant. And then Dr. Cuddy adopts the unwanted child.

If only economics were so cut and dried. Markets seem to have concluded that the Fed has figured out how to extricate itself from the massive experimental quantitative easing and zero percent fed funds policies of the past couple of years without doing any harm. Interest rates are still relatively low, volatility is sagging at pre-crisis levels, bond spreads have tightened and equities have rebounded sharply. Commentators have resurrected the "goldilocks economy" phrase from the mid-oughts that served us so well right before the economy crumbled and went to Hell.

Whether the inflationists or deflationists are right won't likely be determined for some time, particularly since Fed policy has so much to do with the outcome. Yet Janet Yellen, widely rumored to be the next Fed Chairman is siding with the deflationists. That, my friends, is why I'm siding with the inflationists. No disrespect to Ms. Yellen, but there is one thing I know for certain: the Fed will not perform its duties perfectly. It always has and always will overshoot in one direction or another. If the person leading the charge is leaning towards a more accommodative monetary policy then we're headed towards much higher inflation down the road.