The Federal Reserve is raising interest rates in a belated response to an inflation that a year ago we were told was transitory and nothing to worry about.
This segment of What’s Ahead warns that the danger now is that the Fed may overreact. There are two types of inflation, monetary and nonmonetary. Each requires a different response.
Monetary inflation occurs when a currency loses value, usually because cash-strapped governments create too much of it. Nonmonetary inflation happens when prices go up because of events, such as bad weather or the Covid-19 shutdowns of economies around the world.
The nonmonetary variety will eventually recede if governments step back and let their economies heal. Unfortunately, the Biden Administration won’t do that.
Monetary inflation could be curbed if the Fed would reduce its bloated money supply and stabilize the value of the dollar. Instead, our central bank wants to slow the economy and jack-up unemployment.
That’s the wrong prescription—and it’s why an unnecessary recession looms.
