I still think it more likely than not that the Fed will be back at the zero lower bound in three years—and that the Fed then will wish that it had cut interest rates next week, rather than raised them, as it will: Narayana Kocherlakota: The Fed Should Prepare for the Unexpected: "Keeping the economy strong is the best defense against recession.... Let’s consider another risk — that the relationship between unemployment and inflation, expressed in what economists call the Phillips curve, will prove different than expected...
...In the Fed’s view, a low unemployment rate spurs inflation by pushing up wages. But there’s a lot of uncertainty about the magnitude of this effect. If it’s stronger than expected (a steep Phillips curve), then the central bank’s planned interest-rate increases will fail to keep inflation in check. If it’s weak (a flat curve), it doesn’t matter much anyway. So in this case, the Fed is better off erring on the side of action, raising rates faster in the hope of hitting its inflation target. Yet the staff paper downplayed and Powell ignored what I see as the most important risk: that the U.S. economy could face a recession in the next couple years. As then-chair Janet Yellen’s speech at Jackson Hole two years ago revealed, the Fed lacks tools to deal with such a contingency. The best way to prepare is to ensure that the economy is as strong as possible when the downturn hits. And that requires keeping interest rates lower than the Fed is currently planning to do...
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