But when the Fed declared a moratorium on its consistent hikes in 2006, not everyone cheered. Said one economist: "According to their statement, the main reason is that the Fed believes inflation is destined to fall even in the absence of further monetary tightening. I find both good news and bad news in that rationale. The good news is that the Fed is looking ahead, acting on a forecast, rather than just opening the window, taking the economy's temperature and deciding what to do. The bad news is that inflation forecasts are not very accurate. And the other bad news is that if the Fed expects a weak economy to drag inflation down appreciably, it must be pessimistic about the outlook for growth" ("Commentary: The pros & cons of unchanged interest rates," Nightly Business Report. PBS.com, 2006). Little had really changed in the economy, said some economists, the Fed was either bowing to public or political pressure not to raise the rates, although inflation was still a potential threat and indications of economic change were mixed ("Commentary: The pros & cons of unchanged interest rates," Nightly Business Report. PBS.com, 2006). Today, the Fed has held the key interest rate steady at 5.25% for "just over a year" and seems unlikely to raise rats in the future ("Public affects inflation," AP Wire, 2007). But although it has defended its recent policy, the Fed admits that its decisions are never a science, and it weights the potential accuracy of forecasts in light of consumer psychology. The current chairman Ben Bernanke said this means that the Fed cannot ignore the threat of inflation anymore than it can ignore indebted consumers who are worried about the effect of high interest rates upon their monthly budget. "If investors, consumers and businesses feel confident that the Fed will keep prices stable...they may be less inclined to act in ways that could aggravate inflation," because "these groups may be less inclined in such circumstances to worry that inflation will eat away at investments and paychecks, and might feel better about longer-term financial planning" ("Public affects inflation," AP Wire, 2007). In short, consumers living off of their assets, like retirees, may be more willing to spend more freely if they feel those assets are not in jeopardy.

Bernanke himself admitted that a "deeper understanding of the determinants and effects of the public's expectations of inflation could have significant practical payoffs," noting that a confident public may be willing to endure momentary rises in inflation, if they feel their long-run expectations are well-founded, but if the public is uncertain, consumer and investor behavior can be highly unpredictable ("Public affects inflation," AP Wire, 2007).
The Fed's own lack of confidence in its predictions highlights not incompetence, but the difficulty of predicting the complex array of forces that affect the economy. Consumer optimism, natural and political forces, and other areas beyond the Fed's immediate control must come into play when it sets the rate of interest. This may suggest that the Fed should be more cautious in creating monetary policy for the economy, because it can affect so many lives based upon uncertain predictions. Still, the Fed's influence is only likely to increase rather than decrease in the future, and all consumers can do is attempt to alter their buying and borrowing habits in light of their own predictions of the Fed chairman's behavior.

Works Cited

Commentary: The pros & cons of unchanged interest rates." Nightly Business Report.

PBS.com. 14 Aug 2006. [18 Jul 2007] http://www.pbs.org/nbr/site/onair/transcripts/060814d/

Fed lifts interest rate to 3.75%" BBC News: Business. 20 Sept 2005. [18 Jul 2007]

http://news.bbc.co.uk/2/low/business/4265872.stm

Interest rates and the economy." Federal Reserve Bank of New York. 2007. http://www.newyorkfed.org/education/economy.html

Public affects inflation." AP Wire. 11 Jul 2007. [18 Jul 2007]

http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20070711/BIZ/707110347/-1/NEWS09&sfad=1

Willis, Gerri. (25 Oct 2006). "How the Fed affects your wallet." CNN.com: Money. [18

Jul 2007] http://money.cnn.com/2006/10/25/pf/saving/toptips/index.htm?postversion=2006102517