Question

what is the potential for inflation in the US economy, considering the Fed's accommodative policies during the Great Recession?

Answer 1

The Great Recession caused the Federal Reserve to do something that was unprecedented. Not only did it cut Federal funds rate, a key gauge of interest rate in the US, all the way back to 0%, it also started buying Treasuries and mortgage-backed securities, also known as quantitative easing, in order to pump in liquidity into the system and boost the economy, which at that time, was in a very bad state. These steps seem to have successfully boosted the economy, in hindsight.

Usually, if interest rates are kept low, it encourages consumers to buy more and companies to take on loans and debts in order to spend more or expand. Hence, the main motive behind keeping interest rates low is to boost consumer and corporate spending in order to boost economic growth.

Hence, cutting the funds rate to 0% could cause inflation rates to increase. Fed's move caused the inflation in the US to rise as a result of improving economy, which is the "good inflation". Inflation rates in the past decade have more or less been positive and within the Fed's 2% goal.

Theoretically-speaking, cutting rates to 0% would have caused inflation rates to surge. However, inflation rates did not move beyond a certain limit because of the shock caused by the great recession. The US and global economy was still recovering from the impact of the great recession. They still are.