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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.

Largely agree. However, the problem the Fed has here is that they want the dollar to stay down. Remember, there are likely two reasons the Fed has kept the foot on the accelerator this long -- to keep real estate strong, and keep the dollar down. Now, they clearly are concerned about how out of control housing has gone in some areas of the country, and are worried about inflation a bit. However, they don't want to worsen the trade deficit by creating a rally in the dollar.

Quite a conundrum. Their solution -- slow but steady removal of the easing. To this point, they've accomplished their goal of not starting a huge dollar rally, even though it looks like it's bottomed. Unfortunately, they haven't stopped the housing bubble yet.