Fed can't control inflation AND stimulate growth

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Voltron says: NPR explains why the Federal Reserve is between a rock and a hard place.

Bob Moon: The stock market tanked again today under the growing anxiety of ever-higher oil prices. Inflation is rising around the world. And critics say the Federal Reserve is standing by and letting it happen, with its lack of attention to the sinking dollar. Barclays Capital complained today that the Fed's credibility is "below zero."

So what can Ben Benanke and Company realistically do about the situation? Marketplace's Nancy Marshall Genzer has been asking some experts.

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Nancy Marshall Genzer: It's been extra hot in Washington over the past few days. But the sweating at the Fed has nothing to do with the weather. The Fed is taking heat for the weakness of the dollar. That weakness has contributed to skyrocketing oil prices. Oil is priced in dollars. When the dollar drops, oil prices rise to compensate.

But John Hancock Financial Services economist Oscar Gonzales says there are other forces at work.

Oscar Gonzales: The price of oil is determining the market. It's a matter of supply and demand.

Nonetheless, oil broke above $142 a barrel today. And that has countries around the world pointing the finger at the Fed. Low U.S. interest rates are being blamed for creating global inflation. Of course, the Fed could raise interest rates to reverse this. Barclays Capital is predicting six interest rate increases by the end of next year.

Mark Gertler: That's just completely knuckleheaded.

Mark Gertler is an economist at New York University. He says the Fed won't act until real inflation problems start showing up in the U.S.

Gertler: But if you sort of calm down and look at the facts, we're feeling the effects of food and energy prices but that hasn't fed into core inflation or wage inflation.

But Moody's dot com chief economist Mark Zandi says if that changes, the Fed won't hesitate to raise rates.

Mark Zandi: If inflation broadly becomes unhinged, starts to rise, they have absolutely no choice. They have to sacrifice the near term economy.

Zandi says there's no way to wring inflation out of the economy, without causing some pain.

In Washington, I'm Nancy Marshall Genzer for Marketplace.