Inflation hits close to home

We are on the cusp of an economic crisis, one that I hope the Federal Reserve's Open Market Committee considers when it votes on whether to cut interest rates again this week.

I'm speaking, of course, about the rising price of Cool Ranch Doritos.

Frito-Lay, the maker of my favorite junk food, said last week it was raising prices, mostly on larger bags of snacks, because of higher prices for grain, cooking oil and energy. It admitted it already cut back on the number of chips per bag (I knew it!).

So I say to Ben Bernanke and his Money Brigade: Enough is enough. When economic policy infringes on the affordability of snack food, it's time to change course.

Still, I'm a professional. I know that monetary policy should be determined by more than just one columnist's cravings.

So I called Bob McTeer, the former president of the Federal Reserve Bank of Dallas and a man who's attended quite a few FOMC meetings. When I reached him, he'd just started on a slice of coconut cream pie.

No doubt he paid more for it than he would have a few months ago, but I didn't ask about his dessert. We had meatier issues to discuss.

I talked to McTeer at length about Fed policy last August, before the first round of rate cuts, and I wanted to get his assessment eight months and six cuts later. Interest rates are 3 percentage points lower than they were then, but it doesn't seem to have helped our slumping economy.

"The Fed's done a pretty good job of adding liquidity, but it's not been that effective so far," McTeer said. "Everybody's afraid of everybody else."

Lenders that a year ago would loan money on as little as a white lie are now afraid to loan even amongst themselves.

Rate cuts alone, though, won't restore rationality to the credit markets.

McTeer said he thinks the Fed may opt for a quarter-point cut in the Fed funds rate at its Wednesday meeting.

Central bank officials already have hinted that if there's a cut, it may be the last one for a while.

Rate cuts can be effective economic stimulants, but repeated cuts have diminishing returns, McTeer said.

"A slight difference in the interest rate doesn't seem to be all that important," he said.

Instead, other Fed actions such as allowing investment banks to borrow from the discount window — a figurative term that refers to the discounted rate at which the Fed loans money to banks — seem to have helped more.

Delayed effect

McTeer said he thinks the Fed, while slow to act on the signs of a slowdown last summer, has responded well since then.

It takes a while to determine the economic impact of rate cuts.

"When policies work, people totally forget about them," McTeer said. "Two years from now, people will forget they averted a crisis and blame them for not fighting inflation."

So the question for Wednesday's meeting is whether the economy needs stimulus, or whether inflation — remember those Doritos — is now a bigger concern.

The Fed has no intricate machinery for tending

the economy.

Instead, it has "one big lever," McTeer said, referring to interest rates.

"It's got to make a choice between a major financial market crisis or being more diligent on inflation," he said. If it chooses the former, it cuts; if it chooses the latter, it raises.

The European Central Bank last week raised rates amid concern of accelerating inflation.

The ECB, though, is charged only with keeping inflation in check, while the Fed is supposed to ensure the stability of our financial system.

Walking a tightrope

For the past eight months, as the mortgage crisis broadened into a full-scale credit crunch, the Fed has walked the tightrope between fighting a recession and fighting inflation.

It chose to battle the more immediate threat, recession, which probably was the right call. That battle, though, comes at a price.

As rates have fallen, so has the value of the dollar. The weaker dollar has contributed to rising prices for energy, food and metals.

California SUV drivers are paying $100 for fill-ups, and Wal-Mart is limiting the sale of rice at Sam's Club.

While the rising price of my beloved Cool Ranch Doritos may capture our — or at least my — attention, of course the concern is far broader.

Inflation is hitting essential grains, such as wheat and corn, and the effect already can be felt in the grocery aisles.

In other words, we can't wait to see if the Fed's recession-fighting policy has worked. It's time to throw the lever the other way.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.