Inflation Scare

“Consistent with its statutory mandate,” the Federal Open Market Committee (FOMC) said, “the Committee seeks to foster maximum employment and price stability.”

Notwithstanding praiseworthy motivation underlying the Fed’s dual mandate, conflicting priorities for the elements comprising the mandate obstruct a dependable focus for monetary policy.

“A central element in successful monetary policy is a strong commitment to a nominal anchor,” a Fed Governor said in a prior speech, defining his opinion for the Committee’s chief priority, “the use of monetary policy actions and statements to maintain low and stable inflation.”  He emphasized the economic significance of price stability.

A strong commitment to price stability helps reduce fluctuations in employment and output in other ways.  First, when inflation expectations are well anchored, a central bank will not have to worry that expansionary policy to counter a negative demand shock will lead to a sharp rise in expected inflation – a so-called inflation scare – that will then push up actual inflation in the future.  Thus, a strong commitment to a nominal anchor enables a central bank to be more aggressive in the face of negative shocks and therefore to prevent rapid declines in employment or output.

Inflation scare is now dominating feelings about economic expectations for America’s trading partners, according to Financial Sense.  Higher inflation overseas will soon translate into higher prices in the United States.

But Barack Obama – who was ineffective with economic stimulus, while focusing his first year in office on unconstitutional legislation for health insurance – is heightening anxiety about inflation scare in the United States, supporting a monetary policy of low interest rates for a weak dollar.

What seems most likely to effect safety and happiness?

Representative John Boehner and Senator Mitch McConnell, leading the United States Congress, should judge it as necessary and expedient to adopt appropriate legislation, with the following objectives relevant to economic prosperity for Americans:

  • Committing the Fed to a single-minded focus on a nominal anchor,
  • Creating jobs for Americans through prudent fiscal policy,
  • Eliminating inflation scare and potential misery due to economic stagflation, and
  • Supporting a strong dollar.

References

Roy T. Meyers, ed., Handbook of Government Budgeting (San Francisco: Jossey-Bass, 1999).

Barack Obama, “Remarks by the President in a Discussion on the Economy in Richmond, Virginia,” September 29, 2010.

Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 1980).

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