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August 24, 2015

Latest Posts from Economist's View

Posted: 24 Aug 2015 12:24 AM PDT
Larry Summers says "Raising rates this year will threaten all of the central bank's major objectives":
The Fed looks set to make a dangerous mistake: Will the Federal Reserve's September meeting see US interest rates go up for the first time since 2006? Officials have held out the prospect that ... rates will probably be increased... Conditions could change... But ... raising rates ... would be a serious error that would threaten all three of the Fed's major objectives— price stability, full employment and financial stability.
Like most major central banks, the Fed has ... a 2 per cent inflation target. The biggest risk is that inflation will be lower than this — a risk that would be exacerbated by tightening policy... Tightening policy will adversely affect employment levels... Higher interest rates will also increase the value of the dollar, making US producers less competitive... This is especially troubling at a time of rising inequality. Studies ... make it clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.
There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks... That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. ...
It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. ... This is the "secular stagnation" diagnosis...
New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.
Posted: 24 Aug 2015 12:06 AM PDT

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