Today’s Must-Must-Read: Alan Blinder: The Fed Can Be Patient About Raising Interest Rates
…“further improvement in the labor market” (even though the unemployment rate is now back to spring 2008 levels), and convincing evidence that inflation (which has been running below target) is heading back to 2%. Waiting for both may require a lot of—well—patience…. The so-called hawks, who have been calling for rate hikes since 2009, have constantly warned of high inflation lurking just down the road. It must be a long road. The Fed’s favorite measure of core inflation (which omits food and energy prices) has been stuck in a narrow range between 1.3% and 1.7% since mid-2012. Headline inflation, which includes food and energy prices, is roughly zero. If the rationale for interest-rate hikes is heading off inflation, this performance practically cries out for patience…. A tight labor market could push up wages faster. Hawks look at today’s unemployment rate, which is 5.5% and falling, and see a labor market that is already tight and getting tighter. Ms. Yellen and the FOMC majority disagree. They patiently await “further improvement in the labor market”….
The impatience crowd once worried loudly and frequently about a different set of problems. Specifically, that near-zero interest rates and/or quantitative easing were allegedly causing financial-market “distortions” and “bubbles.”… The federal-funds rate has been near zero for over six years now, and the Fed’s balance sheet is roughly five times as large as when Lehman Brothers failed. Yet none of the hypothesized financial hazards have surfaced. So you don’t hear the scare stories much anymore. Here, too, the evidence suggests that patience is the right policy. To be sure, the Federal Reserve will not maintain near-zero interest rates and a $4.5 trillion balance sheet forever. Monetary policy will eventually begin to normalize. But not in June, and maybe not in September. Timing, they say, is everything. This is a time for patience.