The Fed: Deal with “Stag”; Deal with “Flation”? (August 7, 2006)
The economy has been heading toward stagflation for over a year. The trade deficit reflects the fact that America does not make anything other than houses that are consumed domestically. Inflation is taking off with a vengeance. Calculating the core price index without accounting for food and energy prices assumes that citizens do not eat or travel or heat and air condition their homes and businesses. The rising cost of energy will act synergistically to drive up the cost of food.
The Fed meets tomorrow. The Fed must not raise the Federal Funds Rate (FFR) because it would exacerbate the stagnation. However, the Fed must raise the FFR to dampen the current and impending inflation. In his academic writings, the Fed Chairman Ben Bernanke refers often to “price stability” as the primary goal of the Fed. Raise the rate .25 percent? Or defer to those on Wall Street who are more concerned about the slowing economy and leave the rate unchanged? Inflation is the graver threat. Raising the rate .25 percent is painful but necessary.