The scenario called stagflation is characterized by a condition of slow economic growth and relatively high unemployment rate accompanied by a rise in prices of commodities. And the United States (US) is bracing for a repeat of what transpired in the 1970's when world oil prices rose sharply.
However, this time, the crisis is spawned by the subprime meltdown. Financial shocks are now spilling over into a global credit squeeze as more and more banks and financial institutions are writing off losses in their financial statements.
But the apprehensions over the domino effects of stagflation across the globe became more restrained as the probability of a US recession seemed more inevitable. The quick-fix that was immediately implemented by the federal government (i.e., slashing benchmark interest rate) somewhat preempted the occurrence of another stagflation.
The short-term effect of this quick-fix solution is that it serves as a cushion in the event of any drastic stock market fall. The monetary easing done by the US central bank forced investors to go to the stock market once again in search for higher yields.
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