Saturday, November 22, 2014

Paul Krugman: Anxieties Over Interest Rates


As usual, my inbox is full of speculations about when the Federal Reserve Board will raise interest rates in the United States. June 2015? Earlier? Has the Fed already waited too long? And as usual, I wonder why anyone is talking about this at all. Yes, the unemployment rate has fallen. But there is huge ambiguity about what level of unemployment is sustainable given the changing demographics, the uncertain degree to which people might return to the work force given better job availability, and so on.

There's also a huge asymmetry in risk between raising rates too soon - which can leave us stuck in either a low-inflation or a deflationary trap for a very long time - and raising rates a bit too late, which at worst means temporarily overshooting an inflation target that's arguably too low anyway. Meanwhile, both wages and the Fed's preferred measure of inflation are showing no hint of an overheated economy.

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