Inflated Worries

Being a frequent contributor to the Jarrod Thomas Show (1310 KNOX AM, Grand Forks) over the last several years I received many questions about inflation. The massive monetary stimulus injected by the Fed in response to the Great Recession “must” be inflationary. Many callers believed there was no way to avoid a massive inflation as an outcome.

Of course most of these comments ignored the fact that the U.S. encountered a massive decline in aggregate demand at the same time as the stimulus and that banks held some of the funds as reserves rather than lending them out.

Excess reserves of depository institutions

Excess reserves of depository institutions

I warned JT that this was coming. The first signs of price increases and the warning sirens are sounding again. (Here is one example, link).These people have been making this call repeatedly for five years and are going to attempt a victory lap at this point and pull a large “I told you so” when the fact of the matter is they sacrificed economic reality to economic theory.

There are also those calling into questions the Federal Reserve’s ability to keep a lid on inflationary expectations. The Fed has tools available if that becomes a significant problem. Rates are low and there is likely room to raise rates to curb expectations at this point while not eroding business performance significantly.

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