Dear Ben,
Congratulations on taking over the Fed. You're now the most powerful person in the American economy.
It would be presumptuous of me to tell you how to do your job. But I'm about to tell you anyway.
First off, don't worry about speculative bubbles. Just because there's irrational exuberance in one sector or another -- high tech or housing, for example -- doesn't mean you should raise interest rates and put a brake on the economy. It's not your responsibility to protect speculators from their own foolishness.
And don't pay attention to what the bond traders want. You don't have to keep them happy, or worry when long-term interest rates are the same or lower than short-term rates.
Also, don't try to get inflation down to zero. That's a recipe for economic disaster. You'd have to raise rates so high you'd bring everything to a screeching halt. One or two of your colleagues on the Open Market Committee may push for this, but ignore them. A little inflation is natural.
In fact, forget trying to target any particular level of inflation as your goal. The fact is, there's no tipping point -- no "inflation genie" that suddenly gets out of the bottle at a certain level. Keep inflation reasonably low, in the range of 2 to 3 percent. But don't get bent out of shape if it edges upward.
And don't worry if consumers and businesses dramatically increase their buying and investing. Inflation will remain tame as long as there's still a lot of productive capacity left in the economy, including lots of people still out of work. Keep interest rates low until the economy's productive capacity is almost fully utilized.
The federal budget deficit is a problem, and you should be anxious about its potential impact on inflation. But not all deficits are equally bad. If the government ran up additional debt by investing in education, basic research and development, necessary infrastructure, and the health of our children, that wouldn't be a cause for worry. These would enlarge the nation's future productive capacity. So they'd reduce the danger of inflation.
Finally, Ben, I've got to tell you: Your responsibility isn't just to fight inflation. It's also to keep unemployment as low as possible, get as many people to work as you can. That's good for the economy. But I'm not just talking economics. What you do is also a matter of plain fairness.
You see, when you jack up interest rates to fight inflation, the first people drafted into the fight are working class and poor, because they're at the end of the job line. They're the first ones fired when you put the brakes on the economy, the last ones hired when you let the economy speed up. What you do will have a bigger effect on the number of people in poverty in America than any other policy coming out of Washington. So keep the working class and poor in mind, Ben.
And good luck.
Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace.
