Last month, Alan Blinder warned that the main risk in monetary policy was pulling away from the stimulus too soon. We responded by pointing out that there was also a danger of letting the liquidity surge roll on too long. The challenge is finding a balance between the two, we argued.
In a follow-up piece today, Blinder basically reiterates his earlier article, asserting that “inflation isn’t the danger.” But he hedges himself a bit this time, advising: “As long as expected inflation doesn’t rise much further, you should find something else to worry about.”
We couldn’t agree more. Inflation’s never a problem, until it becomes one. For the moment, the market’s expectation of inflation is, in fact, quite tame, as Blinder points out. But it’s not today we’re worried about.
Blinder says the Fed is aware of the extraordinary liquidity it’s created and that the central bank will do the right thing at the right time. We all know what the right thing will be–tightening the monetary policy levers. Figuring out the right time to do so will be devilishly tricky. In fact, getting the timing exactly right is virtually impossible. The only question, then, is how do you want to err? Early or late?