Too Loose for Too Long: Has Price Inflation Already Set In

May 04 2011

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This commentary examines the implications of the Federal Reserve maintaining a record low federal funds target rate of 0.00% to 0.25% for a record 29 month period.  It also reviews the implications of the expansion of the Federal Reserve’s balance sheet over the past three years.

 

 

Highlights:

  • The Fed has held constant its target federal funds rate at a record low level of 0.0%-0.25% for a record-long 29 months, and has pumped more than $2 trillion into the money supply.
  • “Inflation is always and everywhere a monetary phenomenon.” -Milton Friedman
  • A “long and variable” lag between monetary policy action and its intended effects means the Fed must act before price inflation begins.
  • Once inflation is entrenched, the Fed must tighten more aggressively to control inflation.
  • Inflation distorts economic decision-making.
  • Signs of emerging inflation and improving economic conditions suggest the Fed should begin to retreat from its loose, accommodative policies.

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