Please ensure Javascript is enabled for purposes of website accessibility
The Fed Ignores Inflation at Its Peril
Inside-Sources
By InsideSources.com
Published 7 years ago on
February 5, 2018

Share


Opinion by
Desmond Lachman

InsideSources.com
It is often said that policymakers who forget history are bound to repeat it. One wonders whether the same might be said of the Federal Reserve in its seeming current disregard of the lessons from the country’s previous inflationary episodes. Despite the growing number of reasons to be concerned that the Fed’s inflation target will soon be breached, the Fed shows little sign of fearing a new bout of inflation through its inaction.
Among the clearest indications of the Fed’s current nonchalant attitude toward inflation risk is its basic adherence to the interest rate path that it set for itself at the start of 2017. It has done so despite the fact that the U.S. economy is currently at very close to full employment and is growing at a healthy clip. It has also done so even though since the start of the Trump administration there have been a number of basic changes that should be raising red flags for the Fed that the U.S. economy might be on the verge of overheating.
One of the changes that one would have thought would have induced the Fed toward a more aggressive monetary policy stance than it has been pursuing has been the strong increase in U.S. stock market prices. Since the start of the Trump administration, U.S. equities have increased by around 30 percent, adding more than $6 trillion to U.S. household wealth.
The Fed’s own estimates suggest that such a large increase in household wealth of itself should increase aggregate demand by the equivalent of more than 1 percent of GDP. That would make the recent stock market increase equivalent to several Fed interest rate cuts in terms of its effect on stimulating an already buoyant economy.

Inflation Risk Complacency

Another factor that one would have thought would have shaken the Fed out of its inflation risk complacency has been the U.S. dollar’s marked decline. Over the past year, the greenback has slumped by more than 13 percent, even before Treasury Secretary Steven Mnuchin began talking the dollar down last week. According to IMF estimates, over time such a large dollar decline must in itself be expected to boost U.S. demand by more than 1 percent of GDP and to add more than 0.25 percent to the U.S. core inflation rate.


U.S. Treasury Secretary Steven Mnuchin
Yet another factor adding fuel to the overheating-risk fire, which the Fed also seems to be ignoring, has been the recent large unfunded U.S. tax cut. According to the non-partisan Congressional Budget Office, this tax cut will meaningfully increase the country’s budget deficit and increase the size of its public debt by around $1.5 trillion over the next decade. Meanwhile, according to IMF estimates, the tax cut could be adding around 0.5 percent of GDP to demand in each of the next three years.
Previous historical experience would suggest that, with the U.S. economy at close to full employment and with it being strongly stimulated by a combination of buoyant equity prices, a slumping dollar and a big tax cut, the Fed has two choices. It can either get itself ahead of the curve by raising interest rates at a more rapid pace than it has been doing to date in an effort to nip an incipient inflation pickup in the bud. Alternatively, it can leave itself at the mercy of the bond market vigilantes who must be expected to come out of the woodwork at the first sign that inflation is picking up.

Fed Needs to be More Aggressive

One must hope that the Fed soon opts for a more aggressive monetary policy than it has been pursuing to date. By doing so, it might spare itself from the wrath of the bond market vigilantes that could add to financial market volatility and that could lead to an abrupt bursting of the global equity market bubble. However, with the Fed soon to be dominated by President Trump appointees wedded to a low-interest rate policy, I am not holding my breath that the Fed will make the right policy choice.

ABOUT THE AUTHOR

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. He wrote this for InsideSources.com.

DON'T MISS

What Are Fresno Real Estate Experts Predicting for 2025 and Beyond?

DON'T MISS

First California EV Mandates Hit Automakers This Year. Most Are Not Even Close

DON'T MISS

Life-Threatening Meals: Restaurants Would Identify Food Allergens for Diners Under This Proposed Law

DON'T MISS

Iran Threatens to Strike US Bases in Region if Military Conflict Arises

DON'T MISS

Trump Has Cut Science Funding to Its Lowest Level in Decades

DON'T MISS

Fresno Measure C Transportation Tax Talks Continue Amid Renewal Uncertainty

DON'T MISS

Judge Bars Trump Administration From Detaining Mahmoud Khalil

DON'T MISS

Is a Waxed Apple ‘Ultra-Processed?’ CA Bill Could Trigger a Lawsuit Barrage

DON'T MISS

Edmunds: These Five Vehicles Are Hidden Automotive Gems

DON'T MISS

GM to Invest $4 Billion to Shift Some Production From Mexico to the US

DON'T MISS

How Your Air Conditioner Can Help the Power Grid, Rather Than Overloading It

DON'T MISS

Hundreds of Laid-off CDC Employees Are Being Reinstated

UP NEXT

Iran Threatens to Strike US Bases in Region if Military Conflict Arises

UP NEXT

Trump Has Cut Science Funding to Its Lowest Level in Decades

UP NEXT

Fresno Measure C Transportation Tax Talks Continue Amid Renewal Uncertainty

UP NEXT

Judge Bars Trump Administration From Detaining Mahmoud Khalil

UP NEXT

Is a Waxed Apple ‘Ultra-Processed?’ CA Bill Could Trigger a Lawsuit Barrage

UP NEXT

Edmunds: These Five Vehicles Are Hidden Automotive Gems

UP NEXT

GM to Invest $4 Billion to Shift Some Production From Mexico to the US

UP NEXT

How Your Air Conditioner Can Help the Power Grid, Rather Than Overloading It

UP NEXT

Hundreds of Laid-off CDC Employees Are Being Reinstated

UP NEXT

National Guard Troops Have Temporarily Detained Civilians in LA Protests, Commander Says

Most G7 Members Ready to Lower Russian Oil Price Cap Without US

21 minutes ago

Republicans in Congress Set to Grill Democratic Governors on Immigration

28 minutes ago

US Files Lawsuit Against New York for Blocking Immigration Officials Near Court

39 minutes ago

Motorcyclist Killed in Crash on Highway 180 in Sequoia National Forest Identified

42 minutes ago

Marines Prepare for Los Angeles Deployment as Protests Spread Across US

51 minutes ago

Boeing Shares Drop as Air India Crash Revives Safety Concerns

54 minutes ago

Wall Street Dips as Middle East Tensions Rise, Boeing Drops

1 hour ago

Fed Seen on Track to Resume Rate Cuts After Inflation, Job Market Data

1 hour ago

Air India Plane Crash: Reactions From Across the World

1 hour ago

UN Nuclear Watchdog Says Iran in Breach of Obligations, Iran Announces Counter-Measures

1 hour ago

US to Pull Some Personnel From the Middle East Amid Rising Tensions With Iran

WASHINGTON/BAGHDAD (Reuters) – President Donald Trump said on Wednesday U.S. personnel were being moved out of the Middle East because...

8 seconds ago

Armored vehicles belonging to Iraqi security forces are stationed outside the U.S. Embassy in Baghdad’s Green Zone, Iraq, June 12, 2025. REUTERS/Ahmed Saad/File Photo
8 seconds ago

US to Pull Some Personnel From the Middle East Amid Rising Tensions With Iran

Former Hollywood film producer Harvey Weinstein appears in Manhattan Criminal Court for his retrial on rape and sexual assault charges in New York City, U.S., June 12, 2025. Jefferson Siegel/Pool via REUTERS
15 minutes ago

Judge in Harvey Weinstein Trial Declares Mistrial on Rape Charge

People take part in the "No Kings Day" protest on Presidents Day in Washington, in support of federal workers and against recent actions by President Donald Trump and Elon Musk, Monday, Feb. 17, 2025, by the Capitol in Washington. (AP Photo/Jose Luis Magana,File)
18 minutes ago

What to Know About ‘No Kings’ Protests Against Trump’s Policies on Saturday

Russian flag with stock graph and an oil pump jack miniature model are seen in this illustration taken October 9, 2023. REUTERS/Dado Ruvic/Illustration/File photo
21 minutes ago

Most G7 Members Ready to Lower Russian Oil Price Cap Without US

Gov. Kathy Hochul of New York responds to questions from Rep. Elise Stefanik (R-N.Y.) during a hearing of the House Committee on Oversight and Government Reform on state immigration policies on Capitol Hill in Washington, on Thursday, June 12, 2025. (Kenny Holston/The New York Times)
28 minutes ago

Republicans in Congress Set to Grill Democratic Governors on Immigration

The crest of the United States Department of Justice (DOJ) is seen at their headquarters in Washington, D.C., U.S., May 10, 2021. REUTERS/Andrew Kelly/File photo
39 minutes ago

US Files Lawsuit Against New York for Blocking Immigration Officials Near Court

fresno
42 minutes ago

Motorcyclist Killed in Crash on Highway 180 in Sequoia National Forest Identified

U.S. Marines with 2nd Battalion, 7th Marine Regiment, 1st Marine Division, who were placed in an alert status over the weekend, are briefed by battalion leadership while rehearsing crowd control tactics at a base in the greater Los Angeles area, California, U.S. June 10, 2025. U.S. Marine Corps/Cpl. Logan Courtright/Handout via REUTERS
51 minutes ago

Marines Prepare for Los Angeles Deployment as Protests Spread Across US

Help continue the work that gets you the news that matters most.

Search

Send this to a friend