Monday, March 29, 2010
Kohn ‘Confident’ Fed to Tighten Credit Before Inflation Flares
Federal Reserve Vice Chairman Donald Kohn believes that the Fed will act in a timely enough manner to prevent inflationary problems related to increasing the money supply with over a $1 trillion in bailouts. The current interest rates are much too low however he is confident that the Fed will increase interest rates high enough to prevent excessive bank lending; increasing the money supply causing inflation. Furthermore, the Fed is taking measures to decrease the excess reserves that banks are holding onto because it is currently hindering the Fed's ability to control the money supply and the economy through policies.
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2 comments:
This seems like a positive as well as a negative thing.Raising the interest rate will stop excessive borrowing, however there may be drastic drop in the amount consumers borrow and that would hinder spending in the economy.
This article addresses the graph we saw in class about the spike in reserves since the start of the crisis. Banks simply are not lending money and it will be extremely difficult for the economy to recover if they do not start. I think it is important to increase interest rates, but I do agree with Mishaal in the sense that it is very risky and could hurt spending, further crippling the economy.
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