Does the Fed Have a ‘Premature Extractulation’ Problem?

Ryan Cooper, of the Week, writes that “the Federal Reserve just can’t seem to get the job done. Since the financial crisis of 2008, America’s central bank has repeatedly tried to stop its unconventional stimulus program — and each time has proven premature.”

“That looks to be happening again today. Just last month, the Fed finally finished tapering off its last round of quantitative easing, and the economy immediately started to slide towards deflation.”

“Market expectations of future inflation have actually been crashing. Here are five-year inflation breakevens:”

“The weird thing about this most recent fall in expectations is that job growth has actually been pretty strong of late. Not nearly what most people would want, of course, but I would have thought it enough to keep inflation stable.”

“Regardless, it seems fairly clear after three rounds of what I’ll call ‘premature extractulation’ that the economy is going to be chronically vulnerable to deflationary forces unless something fundamental changes.”

“There are very good reasons to believe that all-out stimulus just might jolt the economy out of its weak, disinflationary sandpit … On the other hand, there are increasingly good reasons to believe that if they don’t, we could be having this same dang conversation in 2024 over QE11.”

 

1 Comment

  1. Cooper seems overly gloom-and-doom about this situation. After all, isn’t the ONE main “deflationary” element here — albeit an important one — related to the current oil glut and plunging costs per barrel? That has widespread implications across global markets, likely causing all sorts of goods to drop in price, but it doesn’t really correlate to the overall health (or illness) of the US economy . . .

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