Commentary
December numbers indicate the most widely predicted recession is underway. How serious will it be? The answer will depend in large part on upcoming Federal Reserve policy. If the Fed avoids the mistakes it made in 2008, it will slay the inflation dragon with only a moderate 2–3 percent decline in real output.
Last year, the Fed faced a similar situation to 2007, the year prior to the financial crisis. In 2007, the Fed realized it had created too much money. Inflation had increased to what was considered an intolerable rate of 5 percent. To fight inflation, the Fed stopped increasing a key measure of the money supply….