Tuesday, April 29, 2008

Interest Rate Cuts Cause Inflation

I finally have found an article that states what I have been saying to Nomad for a few months now. When The Fed lowers interest rates, it weakens the dollar which is contributing to the rise in cost of oil/gasoline. I asked an economic professor who I know and he confirmed that this made sense to him, but economic policy wasn't his specialty. To put it simply, the by product of lower interest rates is that there are more dollars in the economy. When there are more dollars, the value of each one goes down. As the value of the dollar goes down, prices go up. So, each dollar buys less or any given commodity. (Like Oil) I'm not sure The Fed shouldn't have lowered interest rates, but we need to be honest with the American people that there is no magic fix to our current situation. Now that things have stabilized some, the best policy is probably to do what we can to strengthen the dollar. This is the only way to really lower the cost of oil, gasoline and food.


quizwedge said...

I can't find a reference to it now, but there are other economic theories that say that the amount of currency does not affect inflation. That being said, on the surface, more currency causing inflation makes sense to me.

Sean said...

If money costs less then products are going to cost more to equal the perceived value of the product. Seems like common sense to me.