Low Inflation and Low Growth Mean the Fed Must Act
This morning's economic news is bad: U.S. gross domestic product grew only 2.5 percent in the first quarter, well below the median forecast of 3 percent. And the core personal consumption expenditures price index, a measure of price inflation, came in at 1.2 percent, well below the Federal Reserve's inflation target of 2 percent.
Growth and inflation are still low and unemployment is still high. The Fed has said it will maintain a strongly accommodative stance until unemployment is below 6.5 percent or inflation is above 2.5 percent. Well, unemployment is still 7.6 percent, and inflation is not just below 2 percent now but expected to remain there for the foreseeable future: Bond prices imply expected inflation of just 1.5 percent a year for the next decade.
In March, Federal Reserve officials met and talked about ending their current quantitative easing program sooner than expected. That was a bad idea then, and it's an even worse idea in light of the economic data that have come out since.
Easing boosts growth and creates a risk of higher inflation. Today, we have far more reason to fear slow growth than high inflation. The Fed needs to ignore the inflation hawks and keep easing aggressively.