Dark clouds looming

A good piece from The Economist on “the dark clouds around the silver lining” of Fed monetary policy. A highlight:

…constraining the economy to so low a rate of average inflation is a good way to ensure that very low inflation or deflation becomes a serious threat whenever the next shock hits. That would be nasty in and of itself, given what we have learned about wage rigidity over the course of this business cycle. It is made all the worse by the very high probability that interest rates will quickly fall back to zero during the next downturn. That’s the third reason to pull one’s hair out over the Fed’s preferred approach: the lower the average inflation rate, the lower the nominal interest rate consistent with normal economic growth, and the higher the odds of hitting the zero lower bound whenever trouble strikes.

And the kicker:

…the Fed is the world’s monetary pacesetter, and it is rapidly moving toward tightening at a time when a disinflationary freeze is settling in around the rest of the globe. The Fed may tell itself that its responsibility is to take a very narrow, domestic view. Given the interconnectedness of the global financial system, taking a narrow, domestic view strikes me as a bad idea, even in terms of pure American self-interest.

I think this author is on to something important, but I don’t agree that the Fed is going to be as hawkish as he thinks. I don’t expect a rate hike in 2015 largely for those reasons this author cites. In short, I don’t think the Fed is “rapidly moving toward tightening” right now.

Posted by Nick Freiling

Founder/Director of PeopleFish. I write on technology, market research and economics. Bylines at Startup Grind, FEE, the American Enterprise Institute and the Mises Institute.

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