The Fed has transitioned from interest rate targeting to money supply targeting — the right thing to do once the interest rate instrument reaches zero while the economy continues to weaken. Fed Chairman Bernanke has exerted strong leadership to implement the emergency measures aimed at avoiding deflation that he laid out in a November 2002 speech. With interest rates targeted by the Fed at zero, if deflation takes hold, the risk of a depression rises sharply. Bernanke has wisely opted to pre-empt that outcome by signaling that the Fed is prepared to print money to avoid it.
– John H. Makin is a resident scholar at the American Enterprise Institute.