With the enormous amount of government spending, some level of U.S. inflation is inevitable; but how high that level might get is debatable. With the global economy crawling out of the Great Recession, inflation-flavored fears now fill news broadcasts. As a result, gold and oil prices have climbed as inflation-conscious investors have poured their money into commodities due to fears of a devaluing dollar.
Inflation concerns have been on economists’ minds since the Fed started passing drastic measures to combat our country’s troubled economy. Now, as the worst of the storm appears to be behind us, the concerns about the repercussions of our government’s monetary actions are under the microscope.
The Fed’s commitment to keep the interest rate near zero for the next year has fueled speculation that other central banks will raise interest rates first, which would make other currencies more attractive than the dollar. Australia’s decision last week to raise interest rates already hurt the dollar and suggested that resource-based economies might recover quicker and be more attractive to investors than the United States.
With credit streams far from unthawed, raising the Fed funds rate in the United States at this point could be detrimental. A mainstay in economic reports is the number of challenges the government will soon face with unwinding all the different programs that are currently held up by economic stimulus money.
The concern that the Fed will not be able to appropriately remove its massive monetary stimulus has many experts expecting high levels of inflation as the economy continues to recover. However, labor market slack and weak wage growth could be enough to keep inflation at bay.
A weak dollar does have its upside. In the short term, by making American exports cheaper, a weak dollar can be good for our economy and useful in closing our trade deficit. However, in the long term, if the dollar stays weak, foreign investors will lose interest in putting money into U.S. Treasury securities without the promise of high interest rates. A significant, long-term drop in foreign-investor capital can make it much more expensive for Americans to borrow—something that can only hurt economic growth.
Thomas J. Powell is a Liberty Features syndicated writer. www.libertyfeatures.com.
