Bogeyman or bogey?: There are better and worse arguments for keeping interest rates low

Posted: November 1, 2016 in economy
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With the Federal Reserve set to raise interest rates in December, my colleague R.A. argues that:Fed members argue that they are choosing to raise rates now, before inflation has returned to target, so that inflation will not jump above 2%, forcing them to raise rates in a much more rapid manner. If the choice is between above target inflation and a recession, the Fed will take the latter. They are prepared to risk keeping inflation from ever getting to target in the first place (and also a recession) by raising rates with inflation below 2%…and that…recent experience has probably distorted central bankers' perspective, and made them excessively quick to see inflation in the data and react to it

His criticism of the Fed combines multiple lines of argument. One is that central bankers are too keen to spot inflation in the data. That is probably right. Much has been made of a recent pick-up in core inflation. But it is not all that impressive. Prices excluding food and energy—the “core” measure that the Fed really cares about—are about 1.7% higher than a year ago. But when measured on a rolling three-monthly basis, inflation has been falling since the spring (see chart). The consumer price index, an alternative yardstick, tells a similar story. With inflation both below target and …

via Economic Crisis


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