1. Inflated expectations.
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INTEREST rates , *ECONOMIC indicators , *GOVERNMENT policy , *ECONOMIC policy ,UNITED States economy, 2001-2009 - Abstract
The article comments on economic policy in the United States. This week the Federal Reserve added some flesh to America's skeletal interest rates when it raised them by a quarter of a point, to 1.25%. The market predicts that rates will gradually rise to 4% or thereabouts by the end of next year. The economy is skipping along nicely and rates, after all, are still very low. But the market is also starting to fret about inflationary pressures. Indeed, some--this newspaper included--think that the Fed has been too sluggish: with monetary policy still loose, inflation is likely to creep upwards. But the outlook for interest rates will be quite different if inflation is not America's biggest economic problem. A fascinating paper, "Dicing with Debt", by Stephen King, the head economist at HSBC, a big British bank, explains why it might not be. Mr King's starting-point is that the Fed and other central banks need not have been as worried as they were about the threat of deflation. As the experience of America in the 1930s and Japan in the 1990s shows, central banks can do little about this, because they cannot set interest rates lower than zero. There is thus a distinct danger that by pushing real interest rates back to where they should have been in the first place, monetary tightening will reveal the economic recovery to have been more fragile than most think--and threaten a hard landing and the malign sort of deflation that the Fed was so keen to avoid. This could even mean that rates need to fall next year, not rise. And with rates so low and budget deficits already high, America's economic armoury is much depleted.
- Published
- 2004