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What About Inflation?   January 13th, 2009
Article points out that inflation is currently being ignored       


More observations...

An article at CNN makes a good point about the risk of the Fed leaving interest rates at or near 0% for very long.


The combination of the economic stimulus package proposed by President-elect Obama, the Treasury Department's bank bailout, the Fed's rate cuts and its various lending programs could eventually lead to an awakening of the inflation beast. The Fed has to be mindful of that.

The government has to pay for all this spending somehow and the likely source of these funds, especially since tax cuts are a big part of the proposed stimulus, is probably going to be from new money printed by the Fed. And adding dollars into the system can't help but add to inflationary pressures.

Exactly right. We're going to have a ton of new money pouring into the system; and with a recent article suggesting that the bulk of the Obama stimulus may be having an impact on the economy just as it's recovering on it's own, it seems that that combined with an extremely low Fed rate has the potential for sparking a high level of inflation just as the economy recovers. That will probably force the Fed to tighten monetary policy by taking money out of the system and raising the Fed rate--probably very quickly once they start.

I'd be on the lookout in about 2010 (assuming the recovery is underway by then) for significantly higher inflation, correspondingly higher interest rates, and the price of oil and other commodities will increase with inflation. All of this could be a drag on the economic recovery.

If you're thinking about refinancing your home, now would be a good time to think about it. Rates may drop in the short-term (especially with the Fed buying up mortgage-backed securities to intentionally drive down rates), but over the long-term I think we're looking at higher inflation, interest rates, and commodity prices across the board.

There's no such thing as a free lunch and that (along with increased debt) will be the price we pay for today's bailouts and stimulus package.

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