Are the Feds Fueling Inflation?

Fed's Expansionary Policy to Fight a Recession:

Federal Reserve Chairman Ben Bernanke told Congress on February 27, 2008 that the Feds remain on the course for additional interest rate cuts, thus continuing their expansionary policy to combat recession.  The Feds hope to combat recession because lower interest rates will stimulate economic activity by lowering the cost of borrowing (credit cards, car loans, etc), making it easier for consumers and businesses to buy and build, thus spurring the economy.

Inflationary Pressures

But some of the recent economic reports suggest that the Inflationary pressures have increased by the current expansionary policy.  Inflation will result in higher prices to consumers and businesses.  Also remember that the policy to fight inflation is by raising interest rates (which is a contradictory to fighting recession).  Raising interest rates tends to slow the economy by increasing the cost of borrowing.  The Fed's current policy is to lower interest rates to fight recession. 

By a number of economic reports, our economy is experiencing a weak dollar with soaring commodities (energy (oil has hit +100 a barrel) and food prices) as the economic growth is slowing.  This week, the Consumer Price index showed a 4.3 percent rise in prices for the 12 month period through this January.  This was far above the Feds target.  The Feds still forecast "core" inflation of up to 2.2 percent this year, dropping down into the Fed's preferred range of below 2 percent next year".  But not everyone believes in this forecast as consumers make sacrifices to stretch their income.  With the Stimulus Package rebates, the Feds rate cuts together with a weak dollar and a hike in commodities, some economist fears that we are increasing the money supply too rapidly which will lead to inflation.  A slowing economy is supposed to help keep inflation in check, as weaker demand takes some pressure off prices.  But there are forces driving prices higher. Oil prices are being driven higher, in part, because oil producers are having trouble finding new reserves fast enough to keep up with the growth in global demand and the depletion of older oilfields.  Food prices have also been moving higher, in part, because of those higher energy costs and the need to find alternatives to oil.

No one wants inflation. Here are some of the ways inflation will affect You.

• Prices will rise at a quicker pace than your wages so you, the consumer, see a decline in your purchasing power.
• Uncertainty about what will happen next makes corporations and consumers like you less likely to spend. This hurts economic output in the long run.
• People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
• If the inflation rate is greater than that of other countries, domestic products become less competitive.

Other Post that you might like to Read:

1. Freddie and Fannie Are Able To Buy More Mortgages!!!!
2. Surprise, Surprise, The Senate Pass Their Version of the Economic Stimulus Package!!!
3. Proposed Economic Stimulus Package Proposals Affecting Real Estate Market

Definitions:

Inflation:  When economists talk about inflation they mean that the general level of prices is going up. A loaf of bread will be more expensive than it was before. This is also true for the jug of water, and for getting a haircut at the hairdresser's. People in economics call those kinds of things goods and services. A loaf of bread is a good, getting a haircut is a service. So inflation means that more money will need to be paid for the same goods and services. Inflation is measured regularly, and the inflation rate is one of the most important indicators of the state an economy is in. A high inflation means trouble. If inflation goes the other way (you get more bread for your money), it is called deflation and is equally problematic. It's safe to say that economists generally prefer stable prices. There are also other kinds of inflation like hyperinflation and stagflation.

Recession:  A recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

You can find AJ Nisen on Active Rain at Contra Costa California Mortgages.  Call AJ to talk about Mortgage Rates, Free Credit Report or visit AJ's website to use his mortgage calculator. 

Alan 'AJ' Nisen
Mortgage Loan Officer
Email: aj.nisen@bankofamerica.com
http://mortgage.bankofamerica.com/ajnisen 
http://www.activerain.com/ajn