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The Amateur / Vad Yazvinski4/30/2008 12:01 AM ET

Fed's main job: Fight inflation

Let the politicians promise and posture. The Federal Reserve needs to pay attention to its main job. That means an end to interest-rate cuts.

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"In matters of style swim with the current; in matters of principle, stand like a rock." -- Thomas Jefferson

Someone famous once said: "Invest in inflation. It's the only thing that is going up." I could not agree more. In this world of fiat money, one thing is guaranteed -- your money will be worth less tomorrow than today.

As you might have guessed from my previous posts, I am not a great believer in politicians' abilities to guide (or even understand) the economy in general. I get extremely irritated when some of the most vocal and popular of them try to give advice to the Federal Reserve. This advice usually says something like, "I can't believe you have not reduced interest rates again. What the heck is taking you so long? My constituents are suffering and you are doing nothing about it, etc., etc."

I think there should be a prize of some sort awarded annually to a politician who actually asks the Fed to increase rates. The only problem is that this prize could go unclaimed for years.

I've posted my opinion on the Fed's rate cuts many times, so instead of reinventing the wheel -- and with another Fed move due today -- I will just gather some of my previous thoughts, as I think they have not yet lost their relevance.

Crucial decisions

I think the next few weeks will determine the direction the world's largest economy will head for the next few years. If you read most of the mainstream press, it sounds like the path is clear: rate cuts, a shallow recession and a bright future going forward. Not so fast.

It's definitely easy to be a politician and make it sound like all of the world's economic problems can be magically wiped off the face of the Earth by a swift downward hand movement from a wizard named Ben Bernanke. But the truth is popular opinion always swings too far. Rate cuts are rarely followed by short-term market outperformance, so they won't make our problems go away.

In the most recent cycles, the decisions to start cutting rates was relatively simple (in the face of 9/11 or the debt crisis, for example). Most of the time, decisions were on target. The more difficult decision is when to stop cutting rates, and that's where we might have had less success.

At least some of our problems are due to what many believe was one of the few mistakes Alan Greenspan made when he ran the Fed: cutting rates too low.

Is it time to stop?

Continued: Inflation must be defeated

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