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Mark Thoma on the Fed: Doesn't Anybody Know How to Play This Game?

Ben Bernanke appears to be targeting spending growth as of the employment-to-population ratio was not 58.5% but 63%. That is not appropriate:

Mark Thoma:

Will Limiting Inflation Mean Limiting Growth?: Allowing a temporary spell of higher inflation during the recovery does pose some risk to the Fed’s credibility… [but] the risk is small precisely because the Fed has been so careful to establish its inflation fighting credibility in the past…. When the economy is near full employment, the tradeoff between the risk to credibility and the prospect for a faster recovery is unattractive…. But when there is considerable room for the economy to expand, as there is now, the potential benefits from the increase in employment  that this policy is likely to bring about are much larger. Why the Fed places so little weight on these benefits when unemployment remains so high is a mystery.

In comparison to the risks to credibility, which are smaller than they are near full employment, the benefits are large and the tradeoff is positive rather than negative….

If inflation begins to rise before the economy has fully recovered, the Fed shouldn’t react as though its world is coming to an end and immediately begin reversing its stimulus efforts. The resulting increase in interest rates would make the recovery even slower. In fact, given the net benefits that more inflation would provide right now, the Fed should try to raise the inflation rate through additional stimulus programs.

Unfortunately, the Fed has made it abundantly clear that’s not going to happen…

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