Meltzer on the Fed

Alan Meltzer, who having written the longest and most detailed history of the Federal Reserve is an authority on the Fed, was on the editorial page of the New York Times Sunday worrying about inflation in our future. He notes that it is possible that the Fed will withdraw the huge amount of liquidity it has created in the past several months, but he worries the political pressures will stop it.

I do not doubt their knowledge or technical ability. What I doubt is the commitment of the administration and the autonomy of the Federal Reserve. Mr. Volcker was a very independent chairman. But under Mr. Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury: bailing out A.I.G., taking on illiquid securities from Bear Stearns and promising to provide as much as $700 billion of reserves to buy mortgages.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

When will it come? Surely not right away. But sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing.

Meltzer is always worth reading. Read the whole thing.

Update: Krugman responds, and Meltzer replies.

Another update: Melter again.

A third update: Melter on the Enterpriseblog:

Can the Fed control inflation? Absolutely. Will the Fed control inflation? Unlikely. The Fed will face political pressures. It has sacrificed much of its independence and will have a hard time getting it back.