Inflation
diving to dangerous lows
According
to the article on CNN, talking with “James Bullard, president of the St. Louis
FED, is worried inflation may be getting too low”. The FED aims to keep
inflation around 2% a year but is considering raising this to combat the high
levels of unemployment that has been stuck around 7% for several years. (The
FED)
As
we have recently been discussing in class, the unemployment rate and inflation
rate are inversely related. Balancing the economy is a difficult operation that
I did not fully understand at all until taking this course, and I still do not
understand how the FED manages it so well. With the struggling economy in the
process of recovery the FED has to tweak policy and make changes correctly to
avoid another slip into a recession.
To
avoid deflation that would cause our economy to possibly fall into another
recession, the FED may need to make policy changes soon. Including the
possibility of allowing inflation to rise and even go past the normal yearly
level of two percent. Although this may seem bad it is a measure that may need
to be made to attempt to lower our level of unemployment, which have been above
the levels the FED is comfortable with since our recession began. The natural
level of unemployment and inflation is the optimal condition for our economy to
function and is what the FED strives to get to.
Currently
the FED is purchasing “$85 billion a month in Treasuries and mortgage-backed
securities” to try and increase spending by lowering long-term interest rates.
These measures have not set end date, and according to Bullard more purchases
are a possibility with interest rates becoming drastically low. The economy
cannot be fixed overnight and measures like this will take time to come into
effect but hopefully our interest rates will stable out. With interest rates at
a stable point, our economy could begin to try and recover, hopefully lowering
the unemployment rate.
The
inflation rate depends on whether or not the FED tries to make any more changes
to policy to try and stabilize our economy. If the inflation rate continues to
decrease, our government will take measures to avoid another recession. As
mentioned before the FED attempts to encourage spending by lowering long-term
interest rates, and if this does not help the lowering interest rate will
require more policy change.
Although it may not seem like it would be
dangerous, the inflation rate becoming as low as it is terrifies economists.
Economists want to try to stimulate the decreasing inflation rate and the
lurking unemployment rate. To cause some change in our current economy the
inflation rate needs to return to normal levels and hopefully bring down the
unemployment rate.
Source:
"The
Fed's Bullard Thinks Inflation Is Dangerously Low." Economy RSS.
N.p., n.d. Web. 18 Apr. 2013.
Seth Bradley
ReplyDeleteZach, I see what you are saying about the inflation rate in our country at this time. I also agree that I have no clue how the FED can handle it so well and do as good a job with it as they do. Throughout your entire essay all I could think about was the game that we played in class that one day where we had to be the boss and try to manage inflation rates and unemployment rates at the same time. After seeing just on a game how hard it is I can not even imagine what it is like to have to do that in real life. I know that if I had that as my job I would not last very long, according to the game anyways. I feel that we should take the risk of raising the inflation rate in order to try and decrease unemployment. I think that if we can lower unemployment then inflation may not be as bad too. Like you said, this will take a good amount of time and is not something that can just happen overnight. I think that most Americans, at least I do, understand that this is a process that can not be rushed especially if we want it to work effectively. In your article you said that the FED will take charge and make changes if we are too close to another recession, but if we try to change it before a recession then we could possible stay ahead of the game and not have to worry about entering another recession. Although inflation may be a little low, I still feel as if the unemployment rate may be more important than inflation. If we have more people working, and decreasing the unemployment rate then as you said the inflation will inversely react and rise. However, if we have less unemployment rate, then that can give us a good amount of time to try and change the inflation rate with adjustments in the work place without having to make too many cuts to increase unemployment. If we can find a good balance in the unemployment rate and the inflation rates then our country would be in good shape, like you said. Hopefully this day will come sooner than later even though it will take more than one day for this process to happen.