Low Inflation and Low Growth Mean the Fed Must Act

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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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.

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