This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why the Fed may regret targeting low inflation

The Federal Reserve is worried that inflation is too low. People with money in savings accounts and other deposits should be worried too -- but more about the Fed's intentions than about low inflation.

In the statement following its most recent meeting, the Federal Open Market Committee expressed concern over the low recent levels of inflation. Another recent piece from the Federal Reserve Bank of Cleveland explored why it considers low inflation to be a problem, and what some possible solutions might be.

Why consumers may not agree

To most American consumers, and to anyone with savings accounts yielding virtually no interest, low inflation has not been a problem -- it has been the one saving grace of the weak economy. Here are some reasons why the Fed's apparent longing for higher inflation may be misguided:
  1. Disinflation is not deflation. The Cleveland Fed acknowledges that we have been experiencing a slowing rate of inflation, or disinflation, rather than an actual downturn in prices, or deflation. The difference is significant. While deflation can worsen economic malaise by causing people to delay purchases in hopes of lower prices, disinflation is more a symptom of existing economic weakness than a cause of further weakness.
  2. Consider the sources of low inflation. The Cleveland Fed points out that two major sources of slowing inflation have been energy prices and health care costs. However, this follows an extended period in which price increases in these sectors were above overall inflation, so a slowing of these price spirals is welcomed by most consumers.
  3. It is important for wages to rise before inflation. Another source of low inflation has been weak wage growth, and this is a real problem. However, the Fed already has a target of lowering the unemployment rate, and the economy is making progress toward that goal. Lower unemployment will help support higher wages. It is important that wages start to grow before inflation in general does, or else American workers will find themselves still going backward economically.
  4. Stimulative policies have side effects. The Cleveland Fed suggests that more asset purchases and a longer commitment to a near-zero federal funds rate may be the answer. These policies have helped fuel a possible bubble in stocks, and the near disappearance of interest on savings accounts. More of the same is not desirable.
  5. Inflation can be difficult to contain once it gets going. Inflation can become an upward spiral of prices that is tough to end once it starts. The Cleveland Fed acknowledges that when inflation got out of hand in the 1960s and 1970s, it took a deep recession in the early 1980s to subdue it. The Fed may regret poking this monster once they wake it up.

As a huge debtor, the federal government has a significant interest in feeding inflation: Rising prices erode the value of existing debts. But anybody who is a net saver rather than a debtor may just find themselves on the wrong side of the Fed's agenda as a result.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG

Markets

Chart of I:DJI
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASDAQ 4,683.9190 -49.5780 -1.05%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs