Can the Fed prevent inflation?

Can the Federal Reserve keep inflation at bay?

So far, the Fed has used $400 billion in lending programs, combined with interest rate cuts, to help keep inflation from taking over. A highly stimulative policy such as this one is similar to the approach used in 2001 following the bursting of the tech bubble.  But will it be enough this time?  Can the Fed prevent inflation?

Or is inflation already here?

If you follow the stock market you'll have already noticed the hedging against inflation via gold and other commodities. But how close are we to inflation? Is it already here? The U.S. dollar has sunk to unbelievable lows. Just compare it to the Euro or the Canadian dollar (the dollar recently sunk below the value of the Canadian dollar for the first time since I can remember).

Is the Fed's new lending spree really massively increasing the amount of money in our system, and therefore will it soon cause inflation? Experts say the Fed has offset this possibility by selling Treasury securities at the same time. Does a recession therefore automatically hedge against inflation by depressing pricing power? Not necessarily. While commodities prices may have little impact on consumer inflation, labor costs most certainly do. According to Business Week correspondent James Cooper, falling payrolls combined with upward pressure on wages suggests a sustained wage-price increase is very unlikely.

What caused inflation to begin with?

The problem that led to the current recession/ inflation/ stagflation situation began when interest rates were lowered following the 2001 recession, and left that way for too long.  Meanwhile, however, Cooper points out that inflation plants the seeds for its own demise, since rising prices affect purchasing power and demand. What's the next move? What does the Fed need to do to really prevent inflation? The Fed needs to raise interest rates back once credit and housing markets stabilize. So how long will that take? Don't hold your breath!

Reference: Business Week