Monday, 07 Feb 2011 08:35 AM
By Julie Crawshaw
Economist Allan Meltzer says the Fed need to take three steps
to head off looming inflation and prevent a re-run of the 1970s.
These are: Increase the short-term interest rate it controls to
1 percent; announce a specific, detailed plan that explains how
it proposes to reduce about $900 billion of the more than $1
trillion banks continue to hold in excess of their legally
required reserves; and end QE2, its latest round of Treasury
bond purchases.
"If, last November, the Fed had waited two more months before
starting QE2, it would have known that a double-dip recession
was not about to happen. Instead of waiting, the Fed responded
to the cries coming from Wall Street," Meltzer writes in the
Wall Street Journal.
“Throughout its modern history, the Fed has made several of the
same policy mistakes repeatedly,” concentrating on near-term
events over which it has little influence, neglecting the
longer-term consequences of its operations, and believing it
must reduce unemployment when the unemployment rate rises.
Commodity and some materials prices have increased dramatically
in the past year, notes Meltzer. "Countries everywhere face
higher inflation … It is a big mistake to expect that the U.S.
will escape the inflation that is now rising throughout the
world.”
“I believe it is foolhardy to expect businesses to absorb all
the cost increases by holding prices unchanged.”
The Washington Post reports that Federal Reserve Chairman Ben
Bernanke, in a speech at the National Press Club, dismissed
fears that rising fuel prices will lead to broad inflation and
suggested that the Fed's program of buying $600 billion in
Treasurys to propel economic growth is working.
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