Nighttime Must-Read: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible
Mark Thoma sends us to: : Only Raise Rates when Whites of Inflation’s Eyes are Visible
I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent. Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy…. Available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent…. In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain…. [Moreover,] if inflation were to accelerate a bit this would be a good thing…. A plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash…. The US has never been more intertwined with the global economy…