Sailing Tips from Mr. Poole

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Q: Are you still worried about inflation?

A: I am concerned that we have a very accommodative policy that will end up yielding an uncomfortable increase in inflation. I do not believe we are going back to the (hyperinflation of the) 1970s.

(Monetary) policy is very responsive to credit market turmoil. The credit market is directly related to the housing problem. That is going to continue unless we have an increase in the inflation rate.

Inflation shows up first in the prices of goods such as food and energy, which have long supply lags. That's exactly what we're seeing. We also have depreciation of the dollar, which is also consistent with leading-edge inflation.

Q: Should the Fed be doing more to fight inflation?

A: The Fed is in a very difficult situation. It would have been easier if rates hadn't been taken down to 2 percent (from 4.75 percent since September). I'd argue that we should reverse some of those cuts (perhaps 1.5 percentage points) on the grounds that those were emergency cuts to deal with credit market disturbances. With the credit market stabilizing, it's time to take that back.

Q: Will the Fed's next rate move be up or down?

A: It's very unlikely the next move will be to lower the rate (absent some surprise shock). My guess is the next move is up. When, I don't know. If we get worse-than-expected news on inflation and benign news on the economy, that might galvanize the Fed to raise rates. If inflation stays very modest, I don't see an increase until next year.

Q: We've got a lot of problems: a weak dollar, soaring oil prices, rising unemployment, housing is still a mess, financial institutions are crumbling. Which do you see as the biggest threat?

A: Some of these are related to the very accommodative monetary policy. It is partly responsible for the weakness of the dollar, which is (raising) import prices. It also has something to do with energy prices and the distress in airlines and automobiles. The economy needs time to adjust to higher relative energy prices.