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Every time he speaks I cringe.

The thing that I really don`t like as of late is this bizarre lack of examining the broad economic field.
I will not pretend to be an economist but I can`t understand his reasoning for raising rates based on inflation fears due to an overheating economy.
This sent the stock market into a two week tailspin combined with soaring speculative oil and gas prices which provide a real inflationary pressure and an economic affect akin to a tax hike.
It would seem that the energy price increase would be a sufficient brake to the economy as to negate interest rate hikes.The inflation that is demonstrated by this is not the result of a hot economy and I fear that indeed this double thrust to put the brakes on will lead to a recession in 12-15 months.

Neutral monetary policy is loosely defined as a fed funds rate equal to the rate of growth in the economy. As we are currently growing at roughly 4%, a neutral policy would be 4%. Now, many economists debate that the increase in worker productivity in the past few years might alter this equation a bit, and make neutral policy 50bps lower than the rate of growth. That would put neutral at 3.5%.

What that means is that 3 1/2 years after the economy first emerged from recession, Fed policy is AT LEAST 75bps UNDER neutral. Hence, the Fed still has its foot on the gas pedal even though the economy has been growing for 14 straight quarters. This is way too aggressive, and is a large culprit for the current expanding real estate bubble.

To me, it appears that Greenspan is making the same mistake that he has made since he was first given the position in 1987 -- leaving interest rates too low for too long resulting in either a rekindling of inflation, or an asset bubble.

Keep in mind that short term interest rates ( the only ones the Fed controls) have been WAY artificially low since the stock market bubble burst. The Fed was quaking in its boots about possible deflation so it decided to err on the side of inflationary stimulus. They probably prevented a substantial economic crash in the wake of the Internet bubble coming apart. But they have been printing money (keeping interest rates artificially low) for a long time now. Printing excess money is the source of ALL inflation.

So here we sit with short term interest rates lower than current inflation and oil prices going through the roof. You may recall that when oil prices spiked during the embargo in the 70's, Nixon took us off the gold standard and the fed printed money (lowered interest rates) in an attempt to counter the negative effect of higher oil. They just made the problem worse and we wound up with huge inflation that required huge interest rates to keep us from going hyper-inflationary (remember Paul Volker?).

What the fed is doing right now is not "tightening" per se. They are simply removing the stimulus they have been applying since the bubble burst. This stimulus SHOULD BE REMOVED in the face of higher oil prices lest we repeat the mistakes of the 70's and return to 17% interest rates, 10% inflation and huge unemployment. They are not applying the brakes to the economy - they are taking their foot off the accelerator. It can easily take a year for the impact of monetary policy to work its way into the economy - so if they wait until inflation is kicking our butts, it will be way too late.