Critics claim the Federal Reserve has been too eager to cut interest rates, and that lax policy has exacerbated inflation. But the Fed should hold its ground, Desmond Lachman argues in the American, until the housing and credit markets are clearly on the rebound. The credit crunch has prompted banks to compensate with higher spreads and tighter lending standards, which should offset inflationary concerns.
"The interest rates paid today by households and corporations are generally no lower than they were last August, when the Fed began cutting the federal funds rate," notes Lachman. Foreclosures and market stresses that threaten the US economy call for a "highly accommodative" policy. "The Fed should ignore its critics and refrain from hiking interest rates," he concludes.