Why the Fed Wants a Tad More Inflation

October 25, 2010 09:13

This is more than a little confusing. In a moribund economy that would benefit from more spending by consumers and businesses, is it really helpful to make them pay more for things?



Now Fed officials want to get inflation a bit higher.

Here’s what they are trying to do, and the risks they are taking:

Fed officials generally believe that 2% is a good, not-too-hot, not-too-cold annual rate of inflation. Through the first eight months of the year, it has instead been running at an annual rate just above 1%.

The Fed sees another reason to want inflation a little higher: To take some burden off of people and businesses with existing debt. Higher inflation tends to go with higher wages, making it easier to pay off fixed-rate loans.

But there are many risks to the Fed’s attempt to boost inflation even a little that give officials pause. One is that while helping borrowers, it is making lending unattractive. “In this environment, the question is who is going to be willing to lend to people,” Mr. Kuttner said.

Another risk is that the Fed might get inflation in all of the wrong places—such as oil or other imported commodities. That would help exporters of these commodities overseas, but would hurt many U.S. consumers.


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