Economist Allan Meltzer says the Fed need to take three steps to head off looming inflation and prevent a re-run of the 1970s.
These are: Increase the short-term interest rate it controls to 1 percent; announce a specific, detailed plan that explains how it proposes to reduce about $900 billion of the more than $1 trillion banks continue to hold in excess of their legally required reserves; and end QE2, its latest round of Treasury bond purchases.
"If, last November, the Fed had waited two more months before starting QE2, it would have known that a double-dip recession was not about to happen. Instead of waiting, the Fed responded to the cries coming from Wall Street," Meltzer writes in the Wall Street Journal.
“Throughout its modern history, the Fed has made several of the same policy mistakes repeatedly,” concentrating on near-term events over which it has little influence, neglecting the longer-term consequences of its operations, and believing it must reduce unemployment when the unemployment rate rises.
Commodity and some materials prices have increased dramatically in the past year, notes Meltzer. "Countries everywhere face higher inflation … It is a big mistake to expect that the U.S. will escape the inflation that is now rising throughout the world.”
“I believe it is foolhardy to expect businesses to absorb all the cost increases by holding prices unchanged.”
The Washington Post reports that Federal Reserve Chairman Ben Bernanke, in a speech at the National Press Club, dismissed fears that rising fuel prices will lead to broad inflation and suggested that the Fed's program of buying $600 billion in Treasurys to propel economic growth is working.
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