Week 2 Inflation and Fed's Problem.docx

Week 2 Inflation and Fed's Problem.docx - The real reason...

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The real reason the Fed is worried with low inflation can be simply attributed to two things. One, the uncertainty in the economy and second, their inability to correctly gauge and predict the various factors that determine the inflation thus leading to prediction in the increase or decrease of the interest rates that are already historically low. 1 Typically, with low unemployment rates, we generally see a rise in inflation. However, this trend has been going in the opposite direction for US that has baffled the US think-thank sitting in the Fed Reserve banks to re-think on their theories on measuring and predicting the inflation for the future. A key theory could be the undervaluation of the unemployment rate. With many people sitting on the sidelines who are willing to come back to work, there isn’t incentive in employers to give them high wages, thus keeping the purchasing power low. A second theory that cannot be overlooked are the factors that are determining the metrics used to predict inflation in a truly globalized economy. Another theory blames
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  • Spring '13
  • ANAND
  • Northeastern

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