Fed needs to hold course for now
At this point in the economy’s recovery from COVID-19, the concern needs to be stagnation, not inflation. Good for Federal Reserve officials for recognizing that.
Central banks are looked to for help in situations such as that facing the economy today. By holding down interest rates, they can prime recovery pumps.
Low interest rates in the United States are a legacy of the “Great Recession.” Unfortunately, just as it seemed American businesses had roared back into action, with historically low unemployment rates, the coronavirus epidemic hit. Mass closures and slowdowns in the economy have forced us to mount a second recovery.
But keeping interest rates low can stimulate inflation, the enemy of working people whose wages often do not keep pace with rising prices. Fed officials understand the need to walk a fine line between the stimulus low interest rates can provide and the inflation that can be a side-effect.
Last week, the Fed provided some reassurance it is not gun-shy regarding inflation. Officials said the Fed will keep interest rates low even if inflation exceeds a previously announced target rate of 2%. Inflation “moderately above 2%” will be permitted, it was revealed.
Good. Our second recovery shows enormous promise, particularly in housing markets where low interest rates have a decisive effect. But it is clear that at least for now, the momentum is shaky. Pulling out the prop of low interest rates could stall the recovery.
For the foreseeable future, then, officials at the Fed should hold to their current course. Paying a little more for goods and services may be an excellent trade for continuing increases in employment.