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.