http://www.economist.com/blogs/freeexchange/2014/12/monetary-policy
This article discusses the extremely low inflation rates in our current economy and how these could potentially harm us in the future. As we discussed in class, the Fed uses inflation as a monetary policy to offset a shock. However, these persistent low rates of inflation essentially remove this option from the table. If we were faced with another negative shock, the Fed would have a hard time increasing the interest rate without causing deflation. In addition, the real interest rates would fall below zero thus requiring the Fed to use unconventional methods such as quantitative easing. What's clear, is that the Fed needs to do something about low inflation rates now to safeguard us from potential shocks in the future.
This is very true. Inflation is the feds weapon when dealing with shocks. Real low inflation takes away the feds go to move to deal with shocks. We don't want to have to deal with deflation because that's usually a nightmare. Hopefully the Fed is thinking about potential shocks in the future and start to act fast.
ReplyDeleteI think this is a good example of what we've discussed in class. Low inflation rates could cause deflation to become a problem in the economy if any negative shocks were to occur in the near future. I definitely agree with your point that the Fed should do something soon in order to prevent potential issues.
ReplyDeleteI agree and i feel that though inflation might be a problem, deflation can be deadly so the Fed should take necessary measures to prevent deflation.
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