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The risk of stagflation increases as the Federal Reserve tightens monetary policy

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

Some observers believe the US government may have misunderstood the looming inflation threat. During the pandemic, Uncle Sam spread historic sums of money to blunt extensive economic damage. Analysts say this stimulus provided strong household savings. A boom in the demand for durable goods followed.

This increase in demand came as global supply chains stalled and a sustained onslaught of inflation followed. In March 2022, prices rose across all categories to historic levels, 8.5% year over year. And investors believe that price increases are not over yet, according to a study by the New York Federal Reserve.

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

Today’s inflation, however, is not rising as it did in recent times. From 1965 to 1982, inflation rose, sometimes reaching double-digit rates. In 1979, the central bank, under Chairman Paul Volcker, started a tightening cycle that resulted in interest rates of almost 20%.

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