Although the Federal Reserve chairman and a few Federal Reserve Bank presidents believe the risk of inflation is nil, rising prices for food and gasoline are slapping consumers in the face. This comes at a time when the economy is still struggling to right itself.
Whispers of likely stagflation—the mix of rising prices with stagnant growth and high unemployment—are heard across the land, as worrisome memories of the depressing stagflation of Jimmy Carter days flow back to mind.
Could the Obama era duplicate the dreary years of Carter’s fail administration? Too many likenesses are already evident. During the Carter Presidency, 7.3 million people were unemployed. Today, 13.5 million are unemployed. The rate of unemployment in Carter’s term was over 7 percent. With Obama in office, we have seen the rate up to 10 percent.
A bitter stalemate between Republicans and Democrats over how to attack the $14.3 trillion debt crisis appears likely. This, together with Obama’s threat of a tax hike, threatens economic recovery and could continue the high unemployment rate.
The Federal Reserve is in charge of monetary policy, which it guides by changing interest rates businesses and consumers must pay. The Fed has tried to hold unemployment down by keeping interest rates near zero. It attempts to target a non-inflationary growth rate of GDP.
But the Fed has been encouraging future inflation by its policies to print more money, thereby reducing the worth of the dollar. The way it does this is by buying bonds from banks. The Fed has been buying bonds since early 2009. It can electronically credit money to the bank accounts of sellers. They, then, sell government securities or mortgaged-backed securities to the Fed. The Fed isn’t printing dollar bills. But it is creating money electronically that wasn’t in the system before. So, in effect, it is printing money. Likewise, Obama has cut into the value of the dollar by spending recklessly.
Policy makers on the Federal Reserve’s Open Market Committee are split over inflation risks. Fed bank presidents, such as Charles Plosser of Philadelphia and Richmond’s Jeffrey Lacker, have said the Fed may well need to raise interest rates this year. On the other side, Fed Vice Chairman Janet Yellen and the Federal Reserve Bank of New York’s president William Dudley have said rates may have to stay low for a longer period.
The Consumer Price Index (CPI), released April 15 increased 0.5 percent in March for urban consumers, the Bureau of Labor Statistics reported. Seems tiny; but the index rose 2.7 percent over the past 12 months for the all-items Index, the largest increase since 2009. “Gasoline and food prices continued to rise and together accounted for almost three quarters” of the “all Items” increase in March.
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