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Stagflation risk rises as Federal Reserve tightens monetary policy

The Federal Reserve is raising interest rates in an effort to defuse an explosive year of price inflation. But global forces could neutralize the effects of this monetary policy tightening and keep inflation high.

Some observers believe that the US government may have misinterpreted the looming threat of inflation. During the pandemic, Uncle Sam has dispersed historic sums of money to mitigate widespread economic damage. Analysts say this stimulus has produced strong household savings. A boom in demand for durable goods followed.

This surge in demand came as global supply chains stalled and a persistent surge in inflation followed. In March 2022, prices across all categories reached historic highs of 8.5% year-over-year. And investors think the price increases aren’t over yet, according to a New York Federal Reserve survey.

“The only way to break the back of inflation spiraling out of control is with very tight monetary policy,” said Richard Fisher, former president of the Federal Reserve Bank of Dallas. “It slows things down because everything gets expensive.”

However, inflation today is not spiraling like it has in the recent past. From 1965 to 1982, inflation soared, sometimes reaching double-digit rates. In 1979, the central bank, under the leadership of Paul Volcker, launched a tightening cycle that resulted in interest rates approaching 20%.

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