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Five things to know about the Fed's obsession with inflation

By Peter Morici
web posted April 21, 2014

Americans struggle with stagnant wages and rising prices. Yet the Federal Reserve is obsessed with boosting inflation with easy money policies that may actually discourage reforms that would help jobs creation and lessen income inequality.

Over the last year, consumer prices were up 1.1 percent. That was historically low, because gasoline fell 8.1 percent.

The Fed fears anything less than 2 percent inflation is detrimental to economic growth. It has printed hundreds of billions of dollars to buy Treasuries and other securities, and kept a lid on short term rates to encourage mortgage lending and other consumer and business borrowing. Yet, inflation remains modest and growth dreadfully slow.

Here are five things to know about inflation and the Fed's obsession.

1. Printing Money Won't Boost Inflation or Growth

When most Americans are employed and factories running full tilt, giving consumers and businesses money to spend will drive up prices. However, with so much unemployment and idle capacity, more money and spending should instigate increased production and jobs. Yet, easy money policies are accomplishing neither.

The banks are not lending as they did before the financial crisis. Dodd-Frank has imposed so much red tape on smaller banks those would rather merge with larger banks than make many types of loans. Bigger banks would rather engage in commodity trading and other gambling—flipping aluminum inventories is hardly investing—than lend businesses money to expand.

Nowadays, many folks trust banks less, and have cut back on credit card use.

If businesses can't borrow and consumers won't borrow, the Fed stuffing money into banks won't stimulate inflation or growth.

2. Easy Money Steals from the Elderly

The top six banks now control the majority of deposits. Along with the Fed's easy money policies, less competition pushes down interest paid on CDs.

Retired Americans rely on CDs to supplement social security and pensions. Recently I visited an upscale California resort, and was shocked to see elderly women, wearing David Yurman jewelry, waiting on tables and tending bars.

3. Federal Policies Guarantee Some Inflation

Many homes have only one source for high speed internet and cable TV, but Washington does not permit local governments to regulate rates.

In many states, a handful of private and state universities have a lock on programs that reliably land students good jobs instead of careers as barristers.

ObamaCare reduced the number of insurance providers in many regional markets.

Federal regulations permit prescription drug manufacturers to charge much higher prices than in other high income countries like Germany.

Those permit cable companies, universities, insurance providers and drug manufacturers to push prices up annually without regard for consumers.

4. Easy Money Slows Growth and Drives Down Wages

Sources of slow growth include: the large U.S. trade deficit on manufactures, caused by Washington's inaction against China and Japan's cheap currency policies; bans on petroleum development off the Atlantic, Pacific and eastern Gulf Coasts; shortages of credit for small business imposed by Dodd Frank; and employers' reluctance to hire created by ObamaCare.

Were the Fed to acknowledge the Administration must reform those growth killing policies instead of endlessly talking about monetary stimulus to thwart low inflation and support growth, when it does neither, public pressure would increase on the president and congress to deal with those issues.

5. Easy Money Exacerbates Inequality

Low interest rates permit Wall Street to borrow cheaply, make big profits trading and pay huge bonuses. Monopoly conditions in other industries enable other excesses in executive compensation, an easy life for professors and so forth. Meanwhile, presidential and congressional inaction, aided by Fed posturing about easy money, keeps a lid on wages.

The Fed's inflation obsession simply feeds Washington's policy dysfunctions and income inequality. ESR

Peter Morici is a professor at the University of Maryland Smith School of Business, a widely published columnist and five time winner of the MarketWatch best forecaster award. He tweets @pmorici1






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