How to End the Stimulus

image provided by howstuffworks.com
image provided by howstuffworks.com

NY Times Article

The combination of a persistently weak labor market and evidence of a little more inflation is prompting an increasingly vigorous debate among Federal Reserve officials about the future of the central bank’s stimulus campaign.

“I would like to see short-term interest rates move higher in response to improving economic conditions shortly after completion of the taper,” Esther L. George.

After months of fretting publicly that prices were rising too slowly, the authors of the Fed’s campaign have shifted to insisting that prices are not rising too quickly.

“I see little prospect of inflation climbing sharply over the next year or two,” William C. Dudley, president of the Federal Reserve Bank of New York, saidin a recent speech. “There still are considerable margins of excess capacity available in the economy, especially in the labor market, that should moderate price pressures.”

John C. Williams [wrote], “Optimal policy should trade off a transitory period of excessive inflation in order to bring the broader measure of underemployment to normal levels more quickly,” Mr. Williams and a co-author wrote.

My opinion: First off, I highly suggest you read the article as there is a lot of very interesting opinions from many of the major players in the Federal Reserve system. I only quoted a few above as I didn’t think quoting the whole article is appropriate.

But as far as the trade-off between inflation and unemployment goes, I’m of the same ilk as John C. Williams. And I’m sure if you have read my blog before you know I’m very much in favor of expansionary policy at this period of time.

Excess inflation, and by that I think somewhere a little north of 2% but not too far above 3%, wouldn’t be a terrible thing in the short-run. Like Dudley pointed out, there is a considerable amount of excess capacity in the economy at the moment. Prices should be held down pretty well because of that and some decent inflation may tighten the slack.

Let me qualify these statements again by saying that I am not promoting inflation above 4% by any means. I think it is important though that people realize inflation above 2% isn’t the end of the world, like many of the inflation hawks you see on TV may lead you to believe.

So should we continue the taper. Sure, although I promoted slowing it earlier I’m fine with not. Should we raise the FFR in 2014? NO. In 2015? Maybe — like in Qtr 3 assuming inflation remains below 3.5% until then.

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