The Fed's reckoning

THE Federal Reserve is at a crossroads, and it doesn't know where it's going. After holding short-term interest rates near zero for six years, Fed policymakers, led by chair Janet Yellen, are prepared to raise them - but when, how much and with what consequences they haven't said.

Higher short-term rates might trigger turmoil in stock and bond markets, as investors adjusted to tighter credit. But it's also possible that the reaction would be muted. The Fed mainly controls short-term rates, and there is only a loose relation between these rates and rates on long-term home mortgages and bonds. These matter more for the economy, and they might barely budge. In economic lingo, the "yield curve" - the gap between short and long rates - would flatten.

Would this happen? We don't know. There was a time when we were more confident. We didn't pay attention to details, because the specialists had matters in hand. During the Alan Greenspan era (1987-2006), the Fed was routinely seen as an economic superman. Its surgical shifts in the "federal funds rate" seemed to stabilise the economy: Expansions were long, recessions rare and mild. (The funds rate is the rate at which banks lend overnight money to each other - and the main rate the Fed manipulates.) Now the Fed often seems a 200-pound weakling.