The Washington Post

Ease interest rate hikes


Regarding the Feb. 18 digest item “Officials stress need to keep raising rates”:

Although the Federal Reserve has been increasing interest rates at a fast pace, the impact on gross domestic product growth and in reducing inflation has been limited. What explains the current strong inflationa­ry pressures?

The data show that most price increases derive chiefly from shelter and energy commoditie­s (oil) and services (gas and electricit­y).

To a lesser degree, inflation is affected by food (meat, poultry and egg prices), “transport” and other goods and services.

What are the experts telling us will occur in these sectors in the near future?

· Shelter prices are expected to decrease as rents have been falling; however, the impact on the consumer price index will take a few months because of a lag in their measuremen­t.

· Food prices will stabilize in a few months as production normalizes.

· Energy is a toss up, as these prices are very volatile.

The above means that inflation will continue to fall later this year. However, if the Fed continues with a very tight monetary policy, it risks an economic recession, a significan­t financial insolvency risk with highly leveraged corporatio­ns and an internatio­nal debt crisis with emerging economies.

How can we reduce inflation and avoid a financial crisis? The Fed should maintain a moderately tight monetary policy and slowly increase interest rates to allow the supply chains to continue normalizin­g their function. Coordinati­ng monetary policy with a fiscal policy to control and finance the deficit is necessary to reduce inflation, which monetary policy alone is currently fighting.

Miguel Penaloza, Manassas

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