A few months ago the Federal Reserve was being hammered for not cutting interest rates enough to stave off the credit crisis. Now it is being attacked for cutting rates too far and causing an oil price spike. This criticism is wrongheaded. But it highlights the difficulty the Fed faces in balancing serious risks to both growth and inflation.

The Fed is not primarily responsible for the rise in oil. This is largely the result of demand pressing on supply in a market with inelastic consumption and little spare capacity. If financial forces were to blame there would be a large increase in physical inventories. There is no evidence of this.