Sunday, December 28, 2014

The Fed walking tightrope between inflation and recession doesn't seem to work anymore

I recently came across an interesting article entitled, The Fed Sets Another Trap. If I'm understanding this article, it seems like it's author Stephen Roach is calling for the Federal Reserve to raise interest rates back to more historically normal levels and reduce some of the money that's now in circulation. Interest rates are unusually low; an unhealthy situation in the long run.

Parting from this article, I have my own thoughts.

Raising interest rates poses the danger of slowing the economic recovery. On the other hand, low rates and extra money may be contributing to localized inflationary bubbles, not just in the future, but right now. Things like the price of urban real estate are spiraling up. Look at housing prices in San Francisco and other cities, for instance.

Walking a tightrope between inflation and recession is a job that the Federal Reserve has been ask to do since it's inception, but that job is becoming increasingly difficult. Should they do stimulus because unemployment and under employment is high, or should they put on the breaks because the cost of certain things are going up?

The cost of many goods and services are remaining stable, or in some cases going down. This is partially due to great efficiencies in the technology of production. These efficiencies are putting deflationary pressure on prices and the wages in the sectors of the economy that provide those goods and services. Other sectors of the economy see prices on the rise.

Just asking whether the Fed should tighten or loosen the money supply is not enough. We need to do something about the growing disparities in our economy.