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.
