Fed Easing And The Debate Over Inflation

PaulVolcker, the aged former Fed chairman, says that quantitive easing poses little threat to the economy. “Inflation is not a problem right now. It won’t be a problem next year, it won’t be a problem for several years,” he stated. The Kansas City Federal Reserve Bank President Thomas Hoenig said that “There are real risks to quantitative easing.” The two comments were made within hours of one another.

The question that many economists have about the Fed’s planned move is whether the central bank has enough “fire power” to add to GDP growth which has slowed nearly to a halt even if the Fed puts $2 trillion into asset purchases. That same concern has been raised for months.

The more recent concerns are that easing will bring a 1970s level of inflation. Money will become so readily available, this school says, that businesses and consumers will be able to buy goods and services with nearly no cost of money. That, in turn, will begin to raise the prices of nearly everything quickly, and may even float the value of residential real estate higher.

Hidden off in the corner as the easing debate goes on is the price of raw commodities. Corn prices are near all-time highs. So is cotton. Oil trades for $80 which is well shy of the $100 that many experts fear, but still double what it was a year ago.

Inflation has somehow begun to creep into the economy. It may be because the demand for agricultural commodities has been lifted by shortages in places like Russia and the growth of needs in large nations such as China. It may be that supply is down due to problems with crops in Russia and fear that drought in the Midwest could cause a low crop yield in America next year.

What is worrisome is not so much that the Fed may ease and begin an aggressive purchase of assets. What is worrisome is that this will combine with a sharp spike in the cost of important commodities and the eventual resurrection of the American consumer to create fast-growing inflation.

The case for inflation has gotten stronger only recently and for now its is gaining strength  by the day.

Douglas A. McIntyre