Fed’s interest in economic recovery seems to be tapering
Maybe the economic recovery will, as the Fed predicts, continue and strengthen despite that rise in rates, but maybe not, and in any case, higher rates will surely mean a slower recovery than we would have had if Fed officials had avoided all that talk of tapering.
Maybe one answer might be that the Fed has quietly come to agree with critics who argue that its easy-money policies are having damaging side-effects, say by increasing the risk of bubbles. I hope that’s not true, since whatever damage low rates may do is trivial compared with the damage higher rates, and the resulting rise in unemployment, would inflict.
My guess is that what’s really happening is a bit different. Fed officials are, consciously or not, responding to political pressure. After all, ever since the Fed began its policy of aggressive monetary stimulus, it has faced angry accusations from the right that it is “debasing” the dollar and setting the stage for high inflation – accusations that haven’t been retracted even though the dollar has remained strong and inflation has remained low. It is hard to avoid the suspicion that Fed officials have been looking for a reason to slacken their efforts and have seized on slightly better economic news as an excuse.
Maybe they’ll get away with it; maybe the economic recovery will strengthen and all will be well, but rising interest rates make that happy outcome less likely. And now that everyone knows that the Fed is eager to slacken off, it will be hard to get rates back down to where they were.
It’s sad and depressing, in both senses of the word. The fundamental reason our economy is still depressed after all these years is that so many policymakers lost the thread, forgetting that job-creation was their most urgent task. Until now the Fed was an exception, but now it seems to be joining the club. Et tu, Ben? – (New York Times service)