A Return to the 1970s?

How the Fed's High-Wire Bank Rescues Increase Inflation Risks

By Charles R. Morris 05/08/2008

The press release announcing the Federal Reserve Bank's latest interest rate reduction on April 30 had the ominous sentence, "uncertainty about the inflation outlook remains high." That is an unusual warning in a period of anemic growth. For anyone who can remember back 30 years, it stirs deep-seated fears.

Inflation is usually a by-product of overly ebullient markets. The absurd run-up in house prices during the first half of the 2000s is a classic example of an inflationary bubble. But there have been times when loose monetary policy overflowed into rapid price inflation even as the economy was slipping. The most notorious case is the devastating 1970s period of "stagflation,"’ when consumer prices jumped by double-digit rates amid a nasty recession.