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Smith
Faculty Opinion Article
The 30 Seconds Outlook
May 1, 2008
"I’ve seen a heap
of trouble in my life, and most of
it never came to pass." -- Mark Twain
The last action of
the FOMC further lowered the Fed
funds rate below the rate of
inflation. Once the impacts on the
credit markets have been assessed to
be positive, the Fed must return to
its stated focus last summer on
inflation. Since the first funds
rate reduction in September, oil
prices have increased 39% and the
index of commodity prices, 24%.
These huge price increases have yet
to be reflected fully in domestic
price levels. Since 1995, and over
30% in the first quarter this year,
the broad money supply has increased
more rapidly than gross domestic
product. Once the more rapid recent
growth in the money supply brings
inflation to the fore, the Fed must
respond like a classic central
banker, which, by the way, should
strengthen the dollar. The Fed will
have to retrace its series of Fed
fund rate reductions until the funds
rate is above the rate of domestic
inflation. These will also be
difficult times for the economy.
by John A. Haslem
John A. Haslem,
Professor Emeritus of Finance,
University of Maryland.
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