WaPo's Samuelson: Economy's Slack Unclear, But Fed Can't Dither on Rate Hikes

Tuesday, 12 Aug 2014 10:05 AM

By Dan Weil

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The economy must rid itself of almost all excess capacity without triggering price pressures — slack — before the Federal Reserve raises interest rates, says Washington Post columnist Robert Samuelson.

But the Fed also must be careful not to delay its move for too long, lest inflation run out of control, he writes.

"Ideally, the Fed would begin raising interest rates sometime just before the economy exhausts its slack," Samuelson says. "But we don't know where that point is. A fair reading of today's mixed evidence is that slack remains sizable, but it may be less than many economists assume."

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

Inflation is low, but the jobs picture is mixed, he notes. Many economists expect the Fed to begin lifting rates in the second or third quarter of next year.

Consumer prices rose 2.1 percent in the 12 months through June.

"The danger of waiting too long or going too slow is that inflation, now controlled in the market and in Americans' thinking, will escape these convenient bounds," Samuelson says. At that point, "inflation takes on a life of its own and becomes self-fulfilling.

"It can be suppressed only through tight credit, recession and high unemployment. We don't want to go there."

Meanwhile, New York Times columnist Neil Irwin says economic output remains $800 billion a year lower than it would be if the economy were cranking on all cylinders. He cites five sectors that are limiting the expansion:
  • Housing is the biggest detractor, accounting for $239 billion of the GDP gap.
  • Decreased spending by state and local governments accounts for $189 billion of the GDP shortfall.
  • Durable goods consumption accounts for $178 billion.
  • Weak business equipment investment accounts for $120 billion.
  • Reduced federal government spending accounts for $118 billion.
Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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