Sunday, February 21, 2010

Stuff I Only Vaguely Understand

I took macro-econ about 4 years ago, so I'm kind of hazy on this sort of thing. Paul Krugman, however, has a Nobel Prize in economics. And he thinks the Fed is tightening monetary policy far too early. Basically, the argument that we keep hearing from the Fed is that the continued low interest rates are a risk of inflation. Note that right now, inflation is nonexistent. And unemployment is still around 10%.

The way it looks from here, monetary policy is still too tight. Of course, interest rates are up against the zero bound, so lowering rates further is not an option for the Fed. It can, however, essentially print money. Since the Fed's normal inflation target is ~2% and right now we're at ~0%, this would actually seem to be in line with the Fed's stated goals.

Instead, Bernanke and the Fed seem to be reacting to an imaginary inflation threat and preparing to pull back, amid 10% unemployment. Color me confused.

The Economist has a good look at the pros and cons here.

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