The Trolley Car Problem – The Fed's Predicament

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This is part one of a two-part series. Part two will appear next week.

An unstoppable trolley car is barreling down the track. As the switchman, you stand at the junction where the track branches and you must choose which path the trolley will follow. Unfortunately, people are tied to both tracks, making the decision incredibly difficult.

The trolley car problem is a well-known ethical question that forces one to choose between two poor consequences. For the Fed, it is whether to allow inflation to fester or to force the economy into a recession.

The Fed and many other central banks face a trolley car problem, albeit lives are not on the line. With inflation running hot and economic activity faltering, years of questionable monetary policy force central bankers to make tough decisions. Such tricky decisions were last made when policymakers were in school or just starting their careers.

Given the extreme debt accumulation of the last 40 years and the heightened speculative nature of financial markets, their choices may be the most important monetary policy actions in our lifetimes. These decisions will have outsized effects on the investment environment for some time.