Raise Rates Or Risk Further Inflation

[Jun 9, 2008.]

Americans are dealing with rising gas prices and food prices while wages are lowering and jobs are becoming scarce. For many the inflation is here and very tangible.

This comes after months of record foreclosures caused by the sub prime mortgage crises and resulting credit crunch. In an effort to turn the tide the Federal Reserve cut interest rates no less then seven times. However, the economy is still weakening which is driving the fears of recession and inflation into the minds of consumers.

The factors are right for a worsening market and growing inflation and the Fed warns that should this continue, interest rates will rise.

“Inflation expectations have remained reasonably well anchored so far,” Minneapolis Fed President Gary Stern said. “which is encouraging.” He goes on to acknowledge that the inflation rates of food and energy are “to rapid for comfort”

While no definitive amount of the rate increase has been discussed, it appears to be in the works. The Federal Reserve will need to work quickly if the situation worsens and Stern agrees stating that the Fed will act in an “appropriate and timely” manner to stave off increasing inflation.

The Federal Reserve started rate cuts in September of 2007 as the first signs of the sub prime mortgage collapse were beginning to show. In September the rates were cut to 5.25% and ended in April at 2%. Since that time the Federal Reserve has stated that rate cuts would stop which has caused a small amount of unease among consumers.

“If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later,” Richard Fisher stated. Fisher is the Dallas Fed President and like Stern, is keeping an eye on the market for signs of a worsening inflation.

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