Tags: Feldstein | central bank | inflation | growth

Feldstein: Central Bank Obsession With Low Inflation Is Misplaced

By    |   Friday, 06 March 2015 08:20 AM

Central banks around the world are concerned with their countries' low inflation rates, mounting massive easing programs to push inflation back up.

In the United States, the Federal Reserve has an inflation target of 2 percent, but its favored inflation measure climbed only 0.2 percent for the 12 months through January.

But there is no clear evidence that low inflation causes harm, says Harvard economist Martin Feldstein. So why are the central banks so worried?

"One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2 percent and then failing to come close to it," he writes in an article for Project Syndicate.

"Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions."

Whatever the case, the extremely low interest rates fostered by central banks have "fueled increased risk-taking by borrowers and yield-hungry lenders," Feldstein says.

"The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy." In the United States, the S&P 500 index has tripled over the last six years.

Meanwhile, when it comes to the Fed, plenty of talk has arisen about reforming it in recent weeks, with Republican congressional efforts to audit the central bank garnering much of the attention.

So what are the crucial issues?

"The real hurdle for Fed reform isn't about unrealistic silliness such as shutting down the bank and returning to the gold standard, or symbolic measures such as opening the Fed to a congressional audit," writes MarketWatch columnist David Weidner.

"Real reform is a structural reform that changes the Fed's mandates and, most importantly, tamps down Wall Street influence. Some moves might include adding the prevention of asset bubbles to the Fed's to-do list, or adding new regional banks in the West."

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Central banks around the world are concerned with their countries' low inflation rates, mounting massive easing programs to push inflation back up.
Feldstein, central bank, inflation, growth
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2015-20-06
Friday, 06 March 2015 08:20 AM
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