Fed fighting the wrong war

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The Fed is fighting the wrong war, with misplaced concern over persistently low US inflation and insufficient regard to build-up of financial risk associated with keeping interest rates so low. The Fed’s failure to “reload its cannon” also leaves itself exposed should a new economic shock knock the US economy off course. The Fed still insists on maintaining an inflation target of 2 per cent. Indeed, a major reason holding the Fed back from raising interest rates is the fact that most measures of consumer price inflation remain below 2 per cent on an annual basis. The combination of solid US economic growth and low inflation is not that puzzling – but rather reflects the fact the economy is enjoying a “positive supply side” shock associated with newly developed oil reserves, globalisation and the ongoing information technology revolution. In this regard, America’s current economic situation is not unlike that of the late 1990s, where low inflation and solid economic growth also coincided. My expectation is that the Fed will raise interest rates in September. To read more click the (VIEW LINK)


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