The Fed's Timidity Is Helping No One

The U.S. Federal Reserve believes it faces a dilemma. Despite more than quintupling its balance sheet from about $800 billion in September 2008 to $4.5 trillion in an effort to stimulate the economy, growth continues to be subpar. A federal funds rate at near zero up until December 2015 did little to encourage consumers to borrow and spend. And although the surge in equity prices boosted consumer wealth, it didn’t lead to increased spending, higher incomes or “a virtuous circle (to) further support economic expansion,” as former Fed Chairman Ben Bernanke wrote in a Washington Post op-ed article in November 2010.

Hand-wringing at the Fed got more intense last week as inflation numbers for July showed that the target of 2 percent annual inflation hasn’t been attained despite years of easy monetary policy. The consumer price index in July rose only 0.1 percent from the prior month, well below consensus expectations. Even more distressing to the central bankers, the monthly inflation rate measured by the producer price index was negative, which could be transmitted to consumer prices in coming months. It isn’t surprising that, in a speech this month Federal Reserve Bank of Minneapolis President Neel Kashkari likened his colleagues’ concern about accelerating inflation to a “ghost story.”