On Helmsmanship

The first ship I ever steered was USS Iowa (BB-61) a 45,000 ton behemoth as long as three football fields, propelled by more than 200,000 horsepower.

The boatswain's mate who taught me to steer emphasized that I shouldn't use too much rudder. If I did, I would be constantly chasing the course back and forth across the compass binnacle and never get it right. Even worse, the constant corrections would slow the ship down and waste fuel. If I just used a light touch, natural wave action would usually bring the ship back on course.

As it turns out, the same principal applies to the economy and inflation.

There are two kinds of inflation. There is "headline" inflation, which includes highly volatile prices like food and gasoline. This kind of inflation is notoriously seasonal and subject to temporary influences (bad weather, for example).

The other kind of inflation is referred to by economists as "core" inflation. That is the underlying inflation rather than day to day price fluctuations.

When the Fed manages monetary policy, they have found through experience that they should limit their measures to those affecting core inflation.

Core inflation right now is less than two percent. Furthermore, it is not increasing and there is no sign it will increase anytime soon.

The problem for most of us is that we spend money at the grocery store and gas station in response to "headline" inflation.

Nonetheless, it would be bad for all of us if the Fed started responding to headline inflation with a heavy hand on the helm. That would be another way to kill economic recovery. Goodness knows, the House of Representatives is doing enough on its own to accomplish that. They don't need the Fed's help.