U.S. needs fiscal responsibility amendment In August, the inflation rate came in at 8.3% — well above expectations in financial markets, triggering a sharp selloff in securities. Investors hoped that lower inflation would prompt the Fed to moderate a policy to increase interest rates. Investors may need to rethink their perception of the relationship between money and prices. Economist Milton Friedman argued that inflation is always and everywhere a monetary phenomenon.  He maintained that increases in the money supply lead to higher prices with long and variable lags. Over the past two decades, low rates of inflation, even in periods of monetary expansion, seemed to refute Dr. Friedman's argument. But Dr. Friedman could not have anticipated the new monetary framework introduced by the Fed over this period. The Fed purchased treasuries and mortgage-backed securities, expanding the balance sheet to more than $4 trillion. This allowed the Fed to expand the money supply while holding interest rates low, without triggering inflation.

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