After doing its best to revive the American economy – by making it more attractive for businesses and individuals to invest – the US Federal Reserve is now focusing its energy on inflation. Due to the rising oil prices, the danger of high inflation is present. Those who know a bit about modern economies know that this is a major concern of any federal or national reserve, but especially of the American one.

Inflation is dangerous. Well, high inflation is dangerous. Alan Greenspan, the former chairman of the Federal Reserve, understood this all too well. Most of his policies were aimed at curbing inflation.

The new chairman, Ben Bernanke, had other worries; the danger was not inflation, the danger was a weak and crumbling economy. That is why the Fed decided to lower interest rates; lowering them makes it more attractive for businesses and individuals to invest instead of saving their money and putting it on the bank. When an economy is struggling, you want people to spend.

But cutting interest rates has a negative effect on inflation. The lower the interest rates, the more people spend, the higher the inflation. This too is dangerous. Now, in combination with rising oil prices, there are two dangers at the same time; inflation and a weak economy. Where inflation was first merely a theoretical concern, it has now become a practical one.

In short: ‘The Fed is in a bind. If it keeps rates low and loans plentiful to combat a recession, inflation could worsen. If it raises rates and tightens the money spigot to fight inflation, the downturn could be deepened and prolonged.’

What’s fascinating about the current inflation problems is that wages are not changing, while prices are.

The question is how can the Fed deal with the problem of inflation and economic misery at the same time? That’s a difficult one. One, I am sure, that will take the Fed months perhaps years to answer. And when the problems disappear, it’s likely that the Fed chairman will say ‘we were surprised by the resilience of the economy.’

This two-fold problem shows something else; it, once again, shows that the Fed is often too concerned with the short term (effects of its policies). Additionally, of course, it’s clear that the Fed is forced to react constantly (instead of anticipating, planning for years, etc.) because US lawmakers don’t do what they should do. As the NYT points out, a good, solid economic plan could change the dynamic considerably. Make the United States less dependent on (foreign) oil, and inflation becomes less of a risk. When inflation poses a lesser threat to the US economy, the Fed does not have to go from repeating cycle to repeating cycle, constantly trying to limit the damage; it can actually focus on a slow but steady grow.

What this entire affair also shows is that the Fed’s actions are often artificial. They’re artificially reviving the economy, they’re artificially keeping things going. The Fed’s actions may very well not be in the interest of the US in the long term. Constantly adjusting interest rates, constantly trying to battle inflation, etc. etc., is causing Americans not to do something about the underlying problems. In this case, oil. Foreign oil especially. In this regard it would, perhaps, be better if Americans would suffer a tremendous blow once; one that shakes up everyone, one that forced legislators to do something about the underlying problems, not just the symptoms.