In the week since the U.S. Department of Labor announced a surprisingly high rate of inflation for April, officials at the Federal Reserve and Treasury Department have been fighting hard to prevent fears of rising prices from infecting the financial markets. It’s a fight they appear to be losing.
Stock markets tumbled Wednesday as the U.S. financial press was full of comparisons of the current economic situation to the late 1960s, when an overheated U.S. economy ushered in a decade of painful price increases beginning in the early 1970s.
The consequences of a repeat of the 1970s would not be limited to the U.S. To fight inflation, the Fed would tighten the money supply by scaling back on asset purchases and raising interest rates. This could be bad news for some developing countries, because it would draw investment capital back to the U.S. But for countries that export to the U.S., it would be good news — a stronger dollar would make imports cheaper and more attractive to U.S. consumers.
Harsh criticism for Fed
Prominent figures from outside the government, including former Treasury Secretary Larry Summers, have been blasting the Fed for days over the central bank’s promise to keep interest rates low for the foreseeable future and to tolerate what Fed policymakers say will be a temporary increase in inflation as the U.S. economy…