Go Figure

   The economy's improving, so Wall Street gasped in horror, dropping more than 200 points from the Dow after hearing that the Federal Reserve may trim its stimulus program.
   Whatever happened to the idea cherished by conservatives that government should not intervene?
   In effect, financial types are moaning, "We can't do it on our own. We need the Fed to keep supporting the money flow."
   The Fed announced on Wednesday that "economic activity has been expanding at a moderate pace," but unemployment is still too high and lack of government spending is restraining growth. Inflation, moreover, is running below the Fed's objective, so the central bank may pull back from its money-pumping program and let inflation rise a bit.

   Horrors! cried Wall Street, and investors sold off bonds as well as stocks, driving everything down.

   A few weeks ago, former Fed Chairman Paul Volcker warned that inflation is hard to control, even with the best of intentions. He should know; when he took on the job as Fed chief in 1979, inflation was 12 percent. When he left eight years later, it was below 2 percent, and interest rates had tumbled.
   Today, interest rates are at historic lows and inflation is below the Fed's target of 2 percent. But if the Fed pulls back from its current monetary policy, interest rates could rise, and that's what rankled investors.

   So the Big Question is whether inflation can be manipulated to control economic growth. Some Big Name economists say yes, and rising inflation can bring down the unemployment rate (remember the Phillips Curve?). Others say no, that inflation is a tiger that, once let loose, is well-nigh impossible to corral.