This is the Cato Daily Podcast for Wednesday, July 23rd, 2008.

I'm Caleb Brown.

Inflation has made a big jump recently, but growth has stayed steady, surprisingly steady.

That may sound a tad familiar and unsettling for those who remember the 1970s.

The Bernanke Fed, to say the least, is in uncharted waters in handling crisis

foisted upon it by the political branches,

but are their hands tied in tackling one of the feds mandates,

namely crushing inflation?

William Niskanin, chairman of the Cato Institute, offers his thoughts.

Well, inflation rates much too high, now the typical rule is that the Fed funds rate ought to be slightly

higher than the inflation rate. Right now the Fed funds rate ought to be slightly higher than the inflation rate.

Right now the Fed funds rate is 2% and consumer price inflation is 5% and producer inflation is 9%.

So we face a very high potential increase in the Fed funds rate. Now to do that

however Bernanke is going to have to tell the White House and anybody else who's

listening that don't expect too much from us.

You have asked us to help bail out the creditors for Bear Stearns.

You want us to provide liquidity to Fannie Mae and Freddie Mac to help to revive the housing market.

Our primary mission is to keep inflation low, and we have not been able to do that at the same time as we

addressing all these concerns in particular sectors.

So he's going to have to have the freedom to do what the Fed can best do, and that's to keep inflation

under control.

The situation that the Bush administration has apparently put this Fed in is to sort of presume an answer to a question

...