Is Fiscal Policy The Answer To The Current Economic Troubles?
It’s quite obvious that the Federal Reserve is having a difficult time handling the twin threats currently facing the economy, recession and inflation. This article on MarketWatch states the answer may lie in the past and how this same problem was handled back in the 1980’s.
If the Fed were to loosen monetary policy to combat recession, it would risk juicing up inflation through rapid money growth. And if the monetary mavens were to rein in money growth to battle inflation, they could very well push the already-weakened economy into a recession because of tight credit and high interest rates.
So here is my idea. The Fed should tighten its monetary policy in order to starve inflation of its fuel. Meanwhile, fiscal policy can be loosened a bit further — say by sending out another round of rebate checks - to promote growth.
It is an intriguing idea, the stimulus checks that went out in May have definitely had a positive impact on economic growth and have relieved some of the pressure consumers were feeling from rising prices. The government would have to act quickly though and with this being an election year, who know how this would all play out.
Tax cuts will always stimulate consumer spending but if the economy has to wait until the next tax season, the current problems will only get worse until that occurs. The other option of fiscal policy would be to increase government spending but that would also bring more headaches from the already bitter budgetary battles.
The Fed has tried to put as much of a positive spin as possible on the threat of inflation but it seems dissension is starting to grow within their own ranks as the last few interest rate cuts voted on were not unanimous. The world’s other central banks are also quite aware of the threat of skyrocketing energy prices and for the most part have avoided cutting rates in the face of slowing economic growth.
The Fed can’t go it alone that’s for sure, something has to be done to help stop the bleeding in the housing sector which has been the cause of all our current economic troubles.
