Economists and some former Federal Reserve officials have warned of impending stagflation in the U.S. economy where prices could rise, the dollar could lose value, and no real growth would occur to create enough jobs.
The Fed has already slashed interest rates to near-zero to cushion against a coronavirus-induced economic slowdown, raising fears that the world’s largest economy could face stagflation.
Stagflation — high inflation combined with unemployment and subdued demand — was a major problem in the 1970s due to oil shocks and surging gas prices. The Fed chose to fight the inflation aspect more aggressively, raising interest rates as high as 20 percent by 1981.
“Stagflation would be a disaster. People are dismissing it as an old threat from the 70s that won’t happen again, but you could see it come back,” Nancy Davis, the chief investment officer of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF, told CNN Business.
Crude oil prices have plummeted along with the broader stock market and long-term bond rates due to the coronavirus pandemic hurting investor sentiment and causing an oil oversupply.
The U.S. is already showing symptoms of stagflation as businesses stumble, joblessness explodes, personal spending plunges, and personal savings spikes.
The only thing left to ensure stagflation is a surge in prices which is expected as the economy is reopened from the coronavirus lockdown as consumers and businesses, armed with low-interest rates from the Fed, spend aggressively after being quarantined.
That would push up consumer prices at the same time unemployment remains high and growth likely negative.
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“I think we’re looking at the near-term prospect of stagflation,” Grant’s Interest Rate Observer founder James Grant told Yahoo Finance.
“I can’t help but wonder what in the world do people see? People seem kind of ducky in the world and things are sub-ducky at the moment. In my mind, it’s a closed book,” he added.