When the Federal Reserve ended its bond purchases in October, you probably thought that meant a reduction of its stimulus. However that's not the case, says Michael Ivanovitch president of economic research firm MSI Global.
The Fed's balance sheet grew $186.7 billion over the last two months to $4.02 trillion. But fear not, says the former New York Fed economist.
"Don't yell at the Fed. It is the only institution holding the world economy together,"
he writes on CNBC.com.
In the United States, fiscal policy remains restrictive, and there is "a large labor market slack," Ivanovitch notes. The labor participation rate stands at 62.9 percent, just above its 36-year low of 62.7 percent.
"With subdued wages and prices, it is no wonder why employment creation has become a major concern in the exercise of the Fed's policy mandate," Ivanovitch writes.
Then there is the strong dollar, which has risen to multi-year highs against a range of currencies in recent weeks. That exacerbates our trade gap by making exports more expensive and imports less expensive.
Meanwhile, former Treasury Secretary Larry Summers says the Fed should be in no hurry to increase interest rates.
"It should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 percent target,"
he writes in the Financial Times.
The Fed's favored inflation measure rose only 0.7 percent last year.
Summers, now a Harvard professor, offers four justifications for his argument.
- "First, real wages for most workers have been stagnant.
- "Second, if inflation were to accelerate a bit this would be a good thing.
- "Third, a plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash at the end of the runway.
- "Fourth, the U.S. has never been more intertwined with the global economy."
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