Fears that highly accommodative monetary policy will lead to a surge in inflation are unfounded, according to a Federal Reserve Bank of San Francisco
"Although inflation is currently low, some commentators fear that continued highly accommodative monetary policy may lead to a surge in inflation," according to Vasco Cúrdia, a senior economist in the Bank's Economic Research Department, the letter's author. "However, projections that account for the different policy tools used by the Federal Reserve suggest that inflation will remain low in the near future. Moreover, the relative odds of low inflation outweigh those of high inflation, which is the opposite of historical projections. An important factor continuing to hold down inflation is the persistent effects of the financial crisis."
The financial crisis caused investment to decline and "underutilization of resources in the economy," caused growth to slow, tamping inflation, according to the letter. "[T]hese effects from the crisis explain a substantial part of the outlook for inflation," Curdia writes.
Monetary policy has kept inflation stable, and "the analysis suggests that monetary policy is not contributing to the risk of inflation being above the median projection in the near future."
