Price stability, regardless of how it is measured and defined, is the ultimate litmus test of monetary policy.
And inflation is always — regardless of sociopolitical outlook — a monetary phenomenon.
Those are the key tenets of the Chicago school of economics, as well as the “killer” arguments of one of its best known proponents — the Nobel laureate Milton Friedman.
Friedman was probably smiling somewhere when President Donald Trump told the Federal Reserve last week that “I don’t like all of this work that we’re putting into the economy and then I see rates going up." As a graduate student, I remember the Friedman grin that looked like he was saying “I told you so.”
What Trump said was a paraphrase of Friedman’s claim that fiscal policy stimuli were ineffective — that is, their medium-term impact is zero or negative, because the ensuing higher inflation and budget deficits force the Fed to initiate credit tightening that usually leads to growth recessions and rising unemployment.
Worrying inflation outlook
Where do we stand on inflation now?
Not sitting pretty, really. The key inflation indicators are hitting at, or above, the upper levels of their target ranges. They are showing an accelerating pattern rather than a stabilizing trend. In particular, that’s the case with the personal consumption expenditures index and the consumer price index.
China and the EU won’t give up trade surpluses
Trade disputes — if they were to lead to supply shortages and price distortions — are another problem in the current inflation outlook. Sadly, the Chinese and the Europeans are ready to fight to keep their surpluses on U.S. trades.
Investment thoughts
Trump’s displeasure about the Fed’s intention to keep rising interest rates sounds like an unwise dig at a central bank that seems hopelessly behind the curve in preventing an inflationary flare-up.
The president could help by getting the Russians and the Saudis to pump more oil to bring energy costs down. So far this year, oil prices are up 18.4percent, and there is no telling how far the U.S. consumer price inflation could go if energy prices were to keep rising.
That is all in Trump’s hands. There is nothing the Fed can do about it.
Reference: CNBC
Read More: https://www.cnbc.com/2018/07/23/best-the-fed-can-do-for-trump-is-to-hold-inflation-down---commentary.html
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