Ex-Fed Economist Warns About ‘Inflation Trap’ As Central Bank Prepares to Vote

Former Federal Reserve economist Marvin Barth warns about the dangers of an "inflation trap" as the central bank prepares to vote on interest rates. The Fed is caught between rising bond yields and stubborn inflation, but Barth argues the panic is based on faulty calculations. He believes the bond yields reflect strong U.S. growth and global competition for savings, while the dollar remains near its decade-long average.

Barth contends that the U.S. faces a primary-deficit problem, not an imminent default or currency run. He argues that debt sustainability is determined by debt growth relative to GDP, not just the nominal dollar value of debt. Despite recent interest rate hikes, he asserts that the U.S. primary deficit is driving debt unsustainability.

Barth dismisses the idea that the Fed can alleviate debt burdens through inflation, stating that it raises refinancing costs and borrowing costs. He concludes that inflating away the debt would only make the problem worse.