On the Economy, Wait Till You See the Whites of Inflation’s Eyes

Paul Krugman writes that “what we’re now looking at is an economy that in important respects resembles that of the 1990s.”

“Pointing out yet again just how wrong the usual suspects on the right have been about, well, everything isn’t the only reason to note parallels with the 1990s. There are also implications for monetary policy: Recent job gains have brought the Fed to a fork in the road very much like the situation it faced circa 1995. Now, as then, job growth has taken the official unemployment rate down to a level at which, according to conventional wisdom, the economy should be overheating and inflation should be rising. But now, as then, there is no sign of the predicted inflation in the actual data.”

“To me … the answer seems painfully obvious: Don’t yank away that punch bowl, don’t pull that rate-hike trigger, until you see the whites of inflation’s eyes. If it turns out that the Fed has waited a bit too long, inflation might overshoot 2 percent for a while, but that wouldn’t be a great tragedy. But if the Fed moves too soon, we might end up losing millions of jobs we could have had — and in the worst case, we might end up sliding into a Japanese-style deflationary trap.”

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