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Stagflation risk rises as the Federal Reserve tightens monetary policy

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To defuse a year of explosive price inflation, Federal Reserve will raise interest rates. However, global forces may be able to neutralize these effects and help keep inflation high.

Some observers think the U.S. government may have misread the looming threat of inflation.Uncle Sam provided historic amounts of cash for the relief of widespread economic destruction during the pandemic. This stimulus, according to analysts has resulted in high household savings. The boom in durable goods demand followed.

As global supply chains became stalled, this surge in demand was accompanied by a steady bout of inflation. Prices rose 8.5% annually year-over-year in March 2022 across all product categories. Investors believe that the price increases are not over, as per a New York Federal Reserve survey.

Richard Fisher, ex-President of the Federal Reserve Bank of Dallas, says that tightening monetary policy is the only way to stop inflation from spiraling out of control. It slows down things because everything gets more expensive.

However, inflation today isn’t as high as it was in recent years. Between 1965 and 1982, inflation rose at twice the rate, sometimes reaching double-digit levels. Under Chair Paul Volcker in 1979, the central banking institute initiated a tightening cycle which resulted almost 20% interest rates.

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