Senior Federal Reserve officials have commented recently on how undesirable it would be if the Donald Trump administration implemented expansionary fiscal policy right now.
This new view is inconsistent with the Fed’s prior position that the labor market is not tight and that meaningful room remains for additional hiring. The Fed argued for some time that there still was plenty of slack in the labor market — the central bank’s primary justification for raising interest rates only very slowly over an extended period. If the Fed really believes that there is a lot of room for incremental hiring and that inflation will remain at bay for another two years, a more stimulative fiscal policy should be welcomed, not discouraged.
In my judgment, rates are too low and the Fed’s monetary policy is overly accommodative, and this will become increasingly apparent as inflation increases in response to economic growth that pushes unemployment even further below full employment. The Fed seems to be shifting its view and adopting that perspective, too, albeit slowly.
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OECD Raises Italian 2017 GDP Forecast to 1%
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Craig Erlam
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