Once again the US Federal Reserve is in a quandary. Does it cut its policy interest rate soon in order to relieve pressure on debt servicing costs for consumers and businesses and perhaps avoid a stagflationary economy (ie low or no growth alongside higher inflation); or does it hold its current interest rate for borrowing in order to make sure inflation falls towards its target of 2% a year?

That’s what mainstream economists and investors in financial assets want an answer to. But it’s not really the important issue. What the Fed’s current quandary really shows is that yet again ‘monetary policy’ (ie central banks adjusting interest rates and money supply) has little effect on controlling inflation in the prices of goods and services that households and businesses must pay.