Skip to content
Subscriber Only

More Inflation Is the Cure for the Fed’s Impotence

Feb. 22 (Bloomberg) -- The U.S. Federal Reserve has all but exhausted its most powerful weapon: the ability to lower short-term interest rates. If it wants ammo to fight the next economic slump, it will have to give up its obsession with ultralow inflation.

Once, not so long ago, Americans thought their central bank near omnipotent. As economist Paul Krugman put it in 1997, the U.S. unemployment rate would be what then Fed Chairman Alan Greenspan wanted it to be, “plus or minus a random error reflecting that he is not quite God.” With the Fed’s short-term interest-rate target at 5.5 percent, the central bank had plenty of room to cut rates if it wanted to boost markets and stimulate the economy. It did just that when financial troubles struck in 1998, keeping the boom roaring for two more years.