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The Most Important Boring Blog We’ve Ever Written: The Federal Reserve and Inflation

- Jun 3, 2013

“Inflation might be good.”

Okay, so no one actually said that at a macro-economic meeting in Istanbul, Turkey this week, but that’s what Minneapolis Federal Reserve Bank President Narayana Kocherlakota suggested.

He, of the unpronounceable name, had slides and everything (we like slides!)  saying that if the Fed let up on the economy a bit and allowed inflation to rise, we might achieve full employment in the US.

We applaud the idea of full employment.

It’s all really complicated, but it seems that the Federal Reserve is buying $85 billion in bonds every month.

What Kocherlakota said was that if they slow that down, it would bring inflation up to the Fed’s goal of two percent and would spark more employment.

“The Fed’s current bond-buying program, aimed at lowering long-term U.S. borrowing costs and boosting growth and hiring, is also expected to boost inflation.

But sometimes, Kocherlakota said, the Fed’s two goals can come into conflict, and the central bank must balance them against each other.

That can lead to a policy that allows inflation to rise above the Fed’s target temporarily, in order to bring down unemployment faster than otherwise, he said.

The Fed’s preferred gauge of inflation rose just 1.1 percent in the past 12 months, data on Friday showed. The Fed watches this index closely to predict the future course of inflation.” – Ann Saphir, Reuters.

We’re not really sure about what all of that means, but it makes some sense.

Inflation, low inflation, means that the economy is growing. More demand means scarcity. Scarcity means higher prices and inflation. Scarcity also means that employers will start hiring to meet higher demand and the cycle keeps going.

Okay, well, we might not ever say this again, but “Yeah! Inflation.”

From the outside and without several degrees in economics, it makes some logical sense and we would like to see someone do something about helping the country increase the speed with which we are able to get everyone back to work.

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By| Bob Peryea

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