2 Answers | Add Yours
To the extent that inflation is not a high priority right now, a decision by the Federal Reserve Board to increase the supply of dollars into the economy could certainly make it a high priority. Economists agree on very little, but most do agree that cavalierly adding to the supply of money already in the system poses a serious risk of increasing inflation. With the economy continuing to have problems – problems that are not the result of an austere monetary policy – contributing inflationary pressures to the current situation could worsen the existing situation.
Reviewing the charter of the Federal Reserve System and its Board of Governors certainly gives one pause with regard to whether the board is acting imprudently with respect to monetary policy. The Federal Reserve Act of 1913, which established the Federal Reserve System, defines “Monetary Policy Objectives” as follows:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” [www.federalreserve.gov/abouthefed/section2a.htm]
Note that twice that statutory definition of the then-newly-established board’s objectives involve “long run” or “long-term” considerations. Decisions regarding monetary policy and interest rates are not easy; they are, in fact, extraordinarily difficult. The banking crisis of 2008 highlighted the ramifications of government oversight agencies, as well as those responsible for setting policy, acting imprudently with respect to private sector financial practices, especially when those practices are influenced by congressional directives (formal or otherwise).
The economic difficulties in which the United States and many other countries have found themselves are not a product of tight money supplies. On the contrary, excessive fluidity could more accurately be considered a principle cause of the financial crisis that struck in 2008. In any event, before the Federal Open Markets Committee, which comprises the Board of Governors along with the presidents of five of the regional reserve banks across the country, decides to increase the flow of dollars into the economy, it first has to be confident that any inflationary tendencies that result from such a decision do not have deleterious ramifications for the economy. Given the effects of inflation on consumer decisions, that is not a decision the Committee, or the Board, should make lightly.
Of course, none of us are privy to the Fed’s inner decision-making process. However, I would speculate that another important factor playing into the Fed’s thinking is the perception of the US economy on the part of investors around the world. I would say that the Fed has to think not only about what the inflation numbers actually are, but also about how investors perceive the chances of inflation.
Of course, we should not overplay how much the Fed is thinking about tapering off from their policy of quantitative easing. After all, they did just recommit to maintaining current policies for a while longer.
Even so, the fact is that they did consider backing away from the quantitative easing. I believe that they are thinking about it because they do not want investors to think that inflation might become a problem. We should note that much of the crisis in Europe has been caused by a lack of investor confidence in those countries. The Fed may well be worrying that continued easing would make investors fear inflation (whether or not those fears are justified) and that those fears would lead investors to be less willing to fund our debt.
We’ve answered 395,814 questions. We can answer yours, too.Ask a question