Economists say Fed plan will bring inflation down, in time – Kenbridge Victoria Dispatch

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By Greg Goldfarb

The KV Dispatch

As Virginians continue to bow to the pressure of record economic inflation, two Virginia economics experts say much-needed financial aid may not be imminent. But, it’s coming.

Consumer prices will likely continue to be higher than usual for the rest of the year and perhaps beyond, as federal monetary leaders find a way to bring down the price of everyone’s commercial goods. days.

And while there may be hope on the horizon, for now, high prices are causing economic hardship for many households and businesses across the state.

“The concern is that inflation expectations have become entrenched, which could make the fight much harder for the Federal Reserve Board,” said Dr. David Lehr, MBA program director and director of the Department of Economics from Longwood University. “Usually the Fed tries to rein in aggregate demand by raising interest rates, but trying to do it just enough to contain inflation without going overboard and causing a recession, like what happened in the beginning of the 1980s. Inflation will return to previous levels, but when and with how much pain is still unknown.

Over the past 100 years, the rate of inflation in the United States has averaged 3.22 percent a year, but hit 18 percent in 1910, and has hit double digits again eight times since then, including 18 % in 1980.

More recently, in the United States, the consumer price index increased by 6.8% between November 2020 and November 2021, mainly due to higher prices for gasoline, food and housing. Rising energy costs have pushed inflation up in 2022 to 9.1%, a high not seen since 1981. Opinion polls indicate this is the top topic on many people’s minds .

The current high inflation is different from that of the past, not only because of the increased dependence of countries around the world on each other to meet their needs, but because it is also affected by the increase in consumption consumers.

“Inflation started to take hold in early 2021, primarily due to an imbalance between aggregate supply and demand in our economy,” Lehr said. “COVID-related issues have reduced supply while the federal COVID stimulus response, combined with pent-up household savings, has resulted in increased demand. Although gasoline prices have fallen, it is too early to tell when headline inflation will reach more normal levels. The inflation seen in the early 1980s was similar to what we see today.

“It’s not uncommon to see inflationary pressures rising when unemployment is low,” Lehr added. “Generally there is a short-term trade-off between good inflation numbers and good unemployment numbers.”

Even if the national unemployment rate is just over 3%, the country could fall into a recession, triggered by people holding onto their money during bad times and also trying to make the most of it.

“Goldman Sacs economists put the odds of a recession at 50/50,” Lehr said. “That’s about where I would put it; it all depends on the ability or luck of the Fed to create a soft landing, as well as any global geopolitical/health issues.

In the United States, the Fed regulates the federal funds rate, which is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight without collateral, according to online data. . Reserve balances are amounts held at the Federal Reserve to maintain the required reserves of depository institutions.

The Federal Reserve recently raised interest rates by three-quarters of a percentage point, the most aggressive hike since 1994, online data shows. This increase puts the benchmark federal funds rate in a range between 1.5% and 1.75%. The Fed also discourages consumers from making large purchases and wants people to cut spending. The goal is to lower demand over time, allowing prices to fall and stabilize. This power to set interest rates is one of the Fed’s main tools to steer the national economy.

With so much economic control exercised at the national level, there is not much action local governments can take to combat economic inflation.

“There’s nothing local and state governments can do except maybe make things a little worse,” Lehr said. “A gas tax exemption, for example, is a very bad idea; refineries are limited and at full capacity right now and a gas tax exemption will only increase demand, leading to higher gas prices that will offset the tax cut. The Federal Reserve is the main decision maker we have to fight inflation. Fiscal policy cannot do much on the supply side. (We should) do what we can to ensure that “demand growth” matches, but does not exceed, “supply growth” in our economy. »

Matthew Todd “Matt” Holt, professor and chair of the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University, links the country’s high rate of inflation to international affairs.

“There is not a main cause,” he said. “This is linked to the war in Ukraine, which has caused massive disruptions in global food and energy supplies and markets. Russia is a major energy supplier, especially for Western Europe. And if the sanctions attacks against Russia are an appropriate response, the impact on global energy markets has been real and significant.

“Supply chain disruptions resulting from the COVID pandemic continue to be a factor, particularly the strict zero-tolerance lockdown policies that China has continued to enforce,” Holt said. “The supplies of finished consumer goods and key manufacturing components continue to be affected by supply chain issues. There is also the impact of the stimulus packages that the federal government offered in 2020 and 2021 As important as stimulus packages were then to stabilize the economy during the pandemic, we are now suffering from part of the proverbial hangover.

Economies don’t stay the same forever, because there are so many internal and external forces that interact with them. Financial markets seek stability to thrive and need to have a clear view of what lies ahead.

“No one can know for sure what a ‘new normal’ for inflation might be,” Holt said. “But Federal Reserve Chairman Jerome Powell has made it clear that the Federal Reserve’s ‘first job’ is to fight inflation; he wants it to stabilize around 2%, ie the expected GDP growth rate. I believe him. I suspect the Fed is even willing to risk tipping the economy into a recession to combat the corrosive effects of inflation. The current inflation picture is unlikely to stick around for long.

Economists are happy the national unemployment rate is low, Holt said, but that could lead to negative outcomes.

“It’s rare to see high inflation and low unemployment at the same time,” he said. “And those are situations that tend not to last long. And they tend to end in a recession. A low unemployment rate alone will not prevent a recession. Rising wages and jobs help to “break the fall” in inflation, but even with recent wage growth of around 5%, with inflation at or above 8%, people are even worse off in terms of purchasing power.

Times may be tough now, but based on historical precedent, all is not lost.

“We are never helpless,” Holt said. “A combination of smart and timely policies and actions can always help mitigate, but not eliminate, major economic risks. We have had many economic difficulties in the past and we have overcome them. »

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