Contact: Stephen Cecchetti, (614) 292-9339
Written by Jeff Grabmeier, (614) 292-8457[email protected]
U.S. FED SHOULD RAISE INTEREST RATES TO AVOID REPLAY OF 1970s
COLUMBUS, Ohio - The U.S. Federal Reserve Board should take the unpopular - but necessary - step of raising interest rates in response to rising oil costs, according to an economist at Ohio State University.
Without action by the Federal Reserve, rising oil costs threaten to spark a period of high inflation and low growth just as it did in the 1970s, said Stephen Cecchetti, professor of economics at Ohio State and former director of research at the Federal Reserve Bank of New York.
"Avoiding a replay of the 1970s requires decisive action to stem inflation before it becomes built into the wage and price setting system," Cecchetti said. "This means raising interest rates so that there is no acceleration in wages and that inflation expectations stay low."
One of the major causes of the stagflation of the 1970s was oil price increases in 1974 and 1979 that brought prices from $4 per barrel at the beginning of the decade to $40 by 1980. These increases, together with the failure of the Federal Reserve to respond appropriately, gave the United States 10 years of inflation over 7 percent and real growth of 2 percent, Cecchetti said.
"If only the Federal Reserve had responded by tightening policy in the face of the energy cost shocks we would have all been much better off," he said.
While oil prices have not risen as dramatically in the last few years - from $15 in 1998 to over $35 today - federal policymakers still should take action now.
"Raising interest rates is never popular, an it is particularly so when the economy is slowing already," Cecchetti said. "Nevertheless it is the right thing to do."
#
RSS