Summary of The Great Inflation Mystery

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The Federal Reserve claims that its decisions to raise or lower interest rates are well reasoned and in line with the inflationary environment. Yet the Fed’s inflation crystal ball is highly clouded, creating a backdrop for monetary policy that may do more harm than good. Bloomberg writer Peter Coy finds that, while inflation is notoriously difficult to measure or forecast, some economists are examining promising new ways to do just that. getAbstract recommends this intriguing article to financial forecasters, economists and others interested in the pitfalls of price predictions.

In this summary, you will learn

  • How the Federal Reserve makes interest rate decisions based on traditional measures of inflation;
  • Why the difficulty of gauging and predicting inflation may taint those decisions; and
  • Why the Fed might consider new, more accurate ways of assessing inflation. 
 

About the Author

Peter Coy is the economics editor of Bloomberg Businessweek.

 

Summary

In the United States and other countries, perceptions about inflation provide a critical beacon for the Federal Reserve and central banks charged with setting interest rates. Yet the causes of inflation, the criteria for quantifying it, the impacts it has on the economy and the mechanisms for adjusting it all remain far from predictable. Daniel Tarullo, who resigned in 2017 from the Federal Reserve’s Board of Governors, observed, “We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy making.” Nonetheless, in March 2018, the Fed increased the federal funds rate target from 1.5% to 1.75% in anticipation of inflation. If history is any indication, Fed rate hikes are frequently too aggressive. Since 1970, weaker economic growth and a recession have followed five of the seven rate-tightening cycles.

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    Maciej Soltysiak 2 weeks ago
    This is tragic. For a good insight on inflation read Prof. Murray Rothbard’s “what has government done to our money’.
    It’s a classic among libertarians and proponents of the Austrian school.

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