Will Rate Cut Cause Inflation?

Of course if you took macroeconomics, the answer is yes... but there are a lot of factors at play.

1. The Fed will cut rates near 0%. This will undoubtedly increase the money supply and the liquidity of the markets. After the September 11th attacks, the Fed lowered rates to 1% and it spurred the housing boom... which led to the housing bust.

2. We're pumping in at least $700,000,000,000 into the economy. Considering our GDP is only about $11 trillion a year, this is a huge investment. This also increases the money supply and the availability of cash and credit.

3. Gas prices have dropped dramatically in the last couple of months. While this is good, all of the extra money that would have went in the gas tank is instead either being saved or being spent on consumer goods. That extra money being spent is being pumped into the economy, also increasing the money supply.

Naturally, these factors will help spur economic growth, which is also a good thing. However, when the economy begins to hum again, this excess money will still be floating around. Coupled with increased spending by a resurgent economy, this could cause severe inflation. Not to mention if gas prices again shoot to $4 a gallon. And if the economy is going well, state and the federal government may also dramatically increase spending. All of these factors could push inflation over 7% by 2011.

Yes, I took macroeconomics.