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Krugman: Fed Should Worry Less About Inflation, More About Jobs

Sunday, 08 April 2012 06:18 PM

The Federal Reserve has a dual mandate: keep inflation rates stable and unemployment optimal.

It's time to forget about the inflation mandate and focus only on creating jobs, Nobel economist Paul Krugman says in his New York Times column.

The country can handle inflation, the side effect of monetary stimulus measures designed to jolt the economy and fuel demand and hiring, Krugman says. 

It can't handle too many people who are unemployed or afraid they're going to be, and Fed Chairman Ben Bernanke should ignore critics in Congress or in the GOP presidential race calling for his ouster due to inflationary fears.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"The attackers want the Fed to slam on the brakes when it should be stepping on the gas; they want the Fed to choke off recovery when it should be doing much more to accelerate recovery," Krugman writes.

"Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing."

Since the downturn, the Fed has cut interest rates to near zero and purchased $2.3 trillion in assets from banks to get the economy growing, and critics insist such liquidity injections will send inflation rates soaring one day.

Krugman points out that critics have been flying warning flags over inflation for a couple of years now, but consumer price indices remain normal although unemployment remains high at 8.2 percent, well above pre-crisis levels.

"To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter," Krugman says.

"And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy."

The economy generated a net 120,000 jobs in March, according to the Bureau of Labor Statistics, far below analysts' expectations.

Warm weather over the winter brought many construction and other jobs on line earlier than normal, which likely pushed up hiring in January and February and corrected in March.

Weak jobs data may prompt the Federal Reserve to buy more bonds from banks in an effort to boost liquidity and hiring, known technically as quantitative easing (QE), but only if more indicators continue to disappoint, other experts say.

"It’s certainly on the table but not because of this. The pressure for QE is really low. You can’t dismiss it, but I don’t think they yet have enough evidence to engage in QE. It’s not just the jobs data. The inflation data is not consistent with QE," Mark Zandi, chief economist at Moody's Analytics, tells CNBC.

"The economy may slow enough this spring into summer, where they decide another round of QE is necessary, but now I’d say no. The odds are still less than fifty-fifty."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Sunday, 08 April 2012 06:18 PM
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