A Patient Fed Is a Good Fed
Take your time, Janet.
Federal Reserve Chair Janet Yellen has sent a clear message to markets: Even if the central bank raises interest rates from near zero before the end of the year, it will take its time so it can keep helping a U.S. economy that's struggling to reach its potential.
For the sake of the millions of people who still need jobs, she's right to be cautious.
Judging from the forecasts released with the Fed's latest monetary-policy statement, the economy remains a lot weaker -- and inflation pressures more subdued -- than central-bank officials thought just six months ago. Their projections for growth this year are clustered around 1.9 percent, and for inflation in 2016 around 1.75 percent. That's far short of the 30-year pre-recession average growth rate of 3.1 percent, and well below the Fed's 2 percent inflation target.
In deciding when to reduce stimulus by raising interest rates, the Fed must strike a difficult balance. It wants to do as much as it can to repair the damage done by the 2008 financial crisis, get people back to work and boost what has been unusually meager wage growth. If it holds rates too low for too long, however, it could create a financial bubble or set off an inflationary spiral, in which rising wages and prices reinforce one another.
So far, those dangers look pretty distant -- as the Fed officials' forecasts demonstrate. Meanwhile, there's a lot of suffering the Fed can work to alleviate. Counting all the people who are underemployed or who are likely to rejoin the workforce in a stronger economy, the U.S. probably still needs about 2.5 million jobs, and possibly more, to get back to full employment.
As Yellen put it in her speech after the Fed's regular policy-making meeting: "Room for further improvement remains." Agreed.
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