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Is the Ugly Inflation Beast About to Gore the Economy?

QE3 cares more about jobs than creeping levels of inflation

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After the Federal Reserve announced its latest quantitative easing scheme, Wall Street was abuzz with the possibilities.

The move makes long-term debt more affordable for businesses and consumers, which theoretically will continue to boost spending! And the open-ended nature of QE3 means the juice will keep flowing until things are fixed!


InvestorPlace writer Dan Burrows recently recapped five things QE3 won’t fix, and two of those items were “higher food costs” and “higher energy costs.”

Which leads me to a very important point everyone should know: The Federal Reserve has a dual mandate to keep a lid on inflation and maximize employment — but lately, it has made clear that is has taken its eye off of inflation altogether.

That’s because inflation is around 2% or so right now (not a big concern to some) and unemployment remains above 8% (that, on the other hand, is a big concern). So the mandate of fixing employment comes first and foremost.

Though Fed chair Ben Bernanke hasn’t given a target on how much inflation is enough to make it “matter” again, Charlie Evans of the Federal Reserve Bank of Chicago has previously advocated continued easing until either unemployment falls below 7% or inflation rises above 3% and stays there.

You heard that right — unless inflation is 3% or more, it’s not even on the Fed’s radar.

Equally important is the fact that an expansionary monetary policy — a kind way to phrase the QE bond buying binges — naturally comes with inflation due to the increase in money supply. Low inflation over the last few years (and, in fact, a fear of the opposite — deflation — during the depths of recession) has made many pundits think there’s nothing wrong with stoking inflationary fires. But history has shown time and time again that once an inflation wildfire breaks out, it can spread quickly and is often incredibly difficult to extinguish.

Those who were alive in the 1965-1980 era of “The Great Inflation” know that all too well. And eerily enough, some experts believe that the cause of this Great Inflation was the fact that monetary policymakers were over-accommodating, allowing expansionary actions intended to fight employment above all else — at the cost of runaway inflation.

Read commentary at the St. Louis Fed about this, written by economist Allan H. Meltzer, for more detail … but allow me to simply show a chart from his work indicating how difficult it was to put the inflation genie back in the bottle once it got out.

Put simply: If the Fed has miscalculated and politicians don’t take the threat of inflation seriously, it may be too late before they realize the errors of their ways.

Article printed from InvestorPlace Media,

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