The Federal Reserve is mismanaging the economic recovery.
Comparing past recoveries with the current episode, The Wall Street Journal in an opinion article titled Growth Deficit writes that during previous recoveries the US economy grew at at least twice the current rate. The Op-Ed, however, does not mention inflation during previous recoveries and inflation now: inflation was twice current inflation also. Moreover, then the Fed had no explicit numerical inflation target.
A 2% inflation target trades-off growth and employment for lower inflation. This is exactly what is happening to the US economy.
It is welcome that the Fed now has an explicit numerical inflation target. Just that that target ought to be 4% instead of 2% if growth and employment are to pick up. Upon recovery inflation can be targeted over the medium term at 2%.
Bernanke first supported raising the debt ceiling, then popularized the term “fiscal cliff” and now complains that the cause of slow growth is fiscal when fiscal prudence is the right thing to do. Does the Fed Chairman understand the meaning of the word “consistency”?
The world economy is slowing down not because of a bias for fiscal prudence but because of tight inflation targets in the G8 countries.
We hope the Fed is listening.