|Janet Yellen, Federal Reserve chairperson|
Dr Peter Morici: 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
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
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone