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325_Supplement14 - Department of Economics University of...

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Intermediate Macroeconomic Analysis Spring 2011 1 Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Supplement 14 Professor Sanjay Chugh Spring 2011 The following article appeared in the Wall Street Journal on April 12, 2011. It describes and analyzes the most recent views shared publicly by Federal Reserve officials about the possible inflationary consequences of various developments around the world, including the recent interest rate hike by the European Central Bank (the counterpart of the Federal Reserve in the euro-zone economies), recent surges in oil and gas prices, and the macroeconomic consequences of geopolitical events such as unrest in the Mideast and Japan’s earthquake.
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Intermediate Macroeconomic Analysis Spring 2011 2 ECONOMY APRIL 12, 2011 Fed Plays Down Inflation Speeches Signal U.S. to Keep Credit Cheap as Others Tighten By JON HILSENRATH Top Federal Reserve officials sent a clear signal that the Fed is unlikely to follow the European Central Bank in lifting interest rates from rock-bottom levels anytime soon, playing down the idea that soaring commodity prices will lead to broader U.S. inflation. Recent increases in prices of oil, grain and other commodities are "unlikely to have persistent effects on consumer inflation or to derail the economic recovery" and are "not likely to warrant any substantial shift in the stance of monetary policy," she said. The key, Ms. Yellen added, is that households and businesses don't expect inflation to take off in the long run. Speaking in Tokyo earlier, William Dudley, president of the Federal Reserve Bank of New York, said, "We think that it's important not to overreact to a rise in headline inflation because the increase in commodity prices is probably going to be temporary rather than persistent"—a sentiment Ms. Yellen echoed.
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