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Archives: Federal Reserve’s monetary policy keeps U.S. economy on a dangerous path

Originally published in May 2011
Simon Nguyen

The U.S. Federal Reserve looks poised to continue its aggressive monetary policy. In spite of recent progresses in the economy, the Federal Reserve will see through its controversial $600 billion bond-buying program. Fed chairman Ben Bernanke has also reaffirmed the central bank’s commitment to keep U.S. interest rates at record-low levels for at least a while longer. As inflation has become a serious threat to the economy, the Federal Reserve is clearly taking a big risk with this decision. 

While there won’t be a third round of quantitative easing, the Fed’s extended postponement of any interest rate hike will create a similar monetary effect. The central bank’s rate inaction, coupled with rising inflation, will further devalue the already depreciating U.S. dollar. Although a weak dollar will provide the economy a temporary boost by making American products more competitive overseas and thus moderately increasing employment, it will also massively augment the U.S. cost of living effectively wiping out Americans’ meager savings.

The Federal Reserve’s lax attitude toward inflation is also one of great concern. Inflation is a force of nature. Once inflation and higher prices are firmly established in the economy, there are very few available options to fight them. Furthermore, the effect of inflation typically lasts for a long time with big social costs. In another word, we could see a situation where fully employed people struggle to maintain even a substandard quality of life.

These risks are the very reasons why China and Europe have been very aggressive in fighting inflation. China has even deliberately slowed its economic growth in a desperate attempt to cool down its inflationary situation. In contrast, the U.S. appears to prioritize the stock market over inflation and price control. The result won’t be a major recession that lasts for one or two years, but will be stagflation that lasts for decades.

During the recession, Bernanke’s Federal Reserve pumped trillions of dollars into the U.S. financial sector in an attempt to rescue the economy. The most logical way to unwind these extraordinary monetary measures is to raise interest rates. The Fed had a chance earlier this year to end its bond-buying program early and begin a gradual increase in interest rates. Unfortunately, Bernanke bypassed that opportunity and continues to pursue the current path. The end result will be a drastic rate hike in early 2012 that will put tremendous strains on the economy.

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