Student Blog: Law, Markets, & The Role Of The State
THE INFLATION PROBLEM
On October 8, Federal Reserve Chairman Ben Bernanke warned that while the U.S. Federal Reserve may continue to “prop up” the economy for an extended period, it cannot do so indefinitely for fear of triggering an inflationary surge.
The Senate is scheduled to vote sometime soon on whether to extend unemployment benefits, possibly even up to 20 extra weeks. Policies like this one, while possibly helping the American people, cannot last forever because of the economic consequences of too-loose of a monetary policy. If we don’t tighten our monetary policies into recovery, inflation will get the better of us.
Last week, Australia boldly increased borrowing costs. But this increase in costs is a good thing for their economy. They say that the worst of the dangers of the economy are over, and for us, they just may be the correct footsteps to follow in – just not yet. Most economists say the recession is over and we’ve now moved into recovery mode. But we must be patient – it could take a while.
Bernanke specified that our economy is not ready to have the Fed tighten up its policies. But he did say that tightening up the policies is the way to go to climb out of the recession and continue toward recovery. Eventually, and again only once the time is right, the Fed will follow in what Australia has done and will slowly raise interest rates on reserve balances that banks keep at the Fed. His goal is to drain cash and help raise short-term interest rates.
But when is this all scheduled to happen? While Bernanke indicated that the Feds are ready to tighten up, they are in no hurry to move. Fed Governor Daniel Tarullo says that with the effects of the February stimulus package diminishing next year, and bank lending declining, there is much uncertainty as to how 2010 will treat us economically.
So there is no set time the Feds will implement the new policies, but if the hand-holding continues for too much longer, we will be walking along the fine line of the greater problem of inflation.
Reference:
http://news.yahoo.com/s/nm/20091009/bs_nm/us_usa_fed
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