Tags: Meltzer | Fed | inflation | rates

Carnegie Mellon's Allan Meltzer: Fed Easing Sets Stage for 'Damaging Inflation'

By Dan Weil   |   Wednesday, 07 May 2014 10:55 AM

The Federal Reserve's massive stimulus program, which has sent its balance sheet soaring above $4 trillion, is laying the groundwork for serious inflation, says Allan Meltzer, a renowned Fed scholar at Carnegie Mellon University.

"The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5 percent this year, the biggest annual increase in three years. Over the past 12 months through March, the consumer price index (CPI) increased 1.5 percent," he writes in The Wall Street Journal.

"These are warnings. Never in history has a country that financed big budget deficits with large amounts of central bank money avoided inflation. Yet the U.S. has been printing money — and in a reckless fashion — for years."

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The budget deficit totaled $680 billion in fiscal 2013, which ended last Sept. 30.

The Fed's quantitative easing has put more than $2.5 trillion of idle reserves on bank balance sheets, Meltzer writes. That means "there is enormous fuel for greater inflation once lending and money growth rises."

To prevent an inflation blowout, the Fed could raise interest rates, but that would risk pushing the economy back into recession, Meltzer says.

"Despite often repeated demands for increased redistribution to favor middle- and lower-income groups, the policies pursued by the Obama administration and supported by the Federal Reserve have accomplished the opposite."

So what's the outcome? "Inflation is in our future," he writes.

Some other economists view the recent increase in inflation as a good thing, as it could signal faster economic growth.

"The overall picture is that inflation has stopped falling and is on a gradual uptrend," Thomas Costerg, an economist at Standard Chartered, tells Bloomberg. "To some extent, [the March CPI] numbers relieve fears about the U.S. slipping into deflation."

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