Tags: Sheila Bair | inflation | income | Federal Reserve

Former FDIC Chief Bair: Low Inflation Hurts 99 Percent of Americans

By    |   Wednesday, 29 January 2014 04:20 PM

Sheila Bair, the former chief of the FDIC, believes the Federal Reserve should
continue tapering its bond-buying program and let borrowing costs climb because low interest rates and low inflation are hurting nearly all American families.

Some experts believe the economy could use a little push and suggest an aggressive monetary policy. As long as the economy remains below the Fed’s inflation target of 2 percent, that argument holds water.

According to a recent CNNMoney analysis written by Bair and her son Preston Cooper (a financial journalist and economics major at Swarthmore), an inflation target above 2 percent will keep the economy out of deflation (commonly referred to as a decrease in the general price level of goods and services) and safe from inflation (a persistent increase in the general price level of goods and services), based on the Fed’s logic.

Editor’s Note: These 38 Investments Have a 96% Win Rate

But instead of looking at the results their policies have on wage-earning families, Fed officials continue to focus on the unemployment rate and “core” inflation (which excludes food and energy-huge components of any household budget) in making decisions on quantitative easing and the perpetuation of near-zero interest-rate policies, Bair and Cooper write

“After the recession hit in 2008, however, a gap opened up between income and prices. Real household income, adjusted for inflation, has therefore declined since the recession,” they wrote.

“The purchasing power of the average American family is still significantly below what it was before the crisis.”

Meanwhile, the risks of low interest rates can be seen in asset inflation. Although that reflects positively for the wealthiest 1 percent segment of Americans (those who own the majority of stocks), such asset inflation could collapse as it did in 2008.

Bair and Cooper say that because of “the unique circumstances of this still-sluggish recovery, the Fed should seriously consider revising its inflation target downward to 1 percent or even lower” below its current 2 percent guideline.

"Faster inflation is a no-show," Stuart Hoffman, chief economist at PNC Financial Services Group, tells Bloomberg. "We're still stuck in a below-2-percent-inflation environment, below the Fed's goal."

However, none of that stopped the Fed from announcing a tapering of its quantitative easing Wednesday. The Fed said it will cut its monthly bond purchases starting in February by $10 billion to $65 billion, the Associated Press reported.

"Ultimately, the Fed sort of had no choice but to reduce purchases at this meeting," Dan Greenhaus, chief strategist at BTIG brokerage, told the AP. "If they had paused, they risked sending a signal to markets that they lacked conviction."

Editor’s Note: These 38 Investments Have a 96% Win Rate

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Sheila Bair, the former chief of the FDIC, believes the Federal Reserve should continue tapering its bond-buying program and let borrowing costs climb because low interest rates and low inflation are hurting nearly all American families.
Sheila Bair,inflation,income,Federal Reserve
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2014-20-29
Wednesday, 29 January 2014 04:20 PM
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