To defuse a year of explosive price inflation, Federal Reserve will raise interest rates. Global forces, however, could mitigate the negative effects of tightening monetary policy and maintain high inflation.
Some observers think the U.S. government may have misread the looming threat of inflation.Uncle Sam dispersed large sums of money to stop widespread economic destruction during the Pandemic. According to analysts, this stimulus resulted in strong household savings. The boom in durable goods demand followed.
As global supply chains became stalemated, this surge in demand was accompanied by a steady bout of inflation. Prices rose 8.5% annually year-over-year in March 2022 across all product categories. According to investors, the rate of price rises is not yet over. a New York Federal Reserve survey.
Richard Fisher, ex President of Federal Reserve Bank of Dallas said that “the only way to end the inflation spiraling out of control” is tight monetary policies. Because everything is more costly, it slows things down.
Today’s inflation doesn’t seem to be spiraling like it used to. Between 1965 and 1982, inflation rose at twice the rate, sometimes reaching double-digit levels. The central bank under the leadership of Paul Volcker initiated an interest rate tightening process that reached nearly 20% in 1979.
While strong monetary policies helped to stop inflation, they also encouraged companies to outsource labor. As a result, American workers saw their labor income stagnate relative to productivity for four decades.
Stagflation is a term that describes both stagnant and persistent inflation.
Today’s Federal ReserveThese leaders want to stop such an unexpected turn of events. Their plan may backfire as inflation is not under the bank’s purview.
You can watch the video to see more information about how the central bank fights stagflation.