Is the Fed ready to pivot?
Date posted: June 17, 2013
One of the big guessing games in Washington concerns the Federal Reserve. There have been hints that the Fed may at least be thinking about making a major policy change, which could affect virtually everyone. What is it? N.C. State University economist Mike Walden responds.
“Well, the pivot would be to move from their policies that are focused on stimulating the economy to policies that would be more concerned with keeping inflation low. And right now, and really for the last five years, the Federal Reserve has been very, very aggressive at trying to stimulate the economy. They’ve done that two ways.
They’ve kept interest rates very low. Short rates are close to zero percent. And they, quite frankly, have been creating a lot of money, increasing the credit supply, trying to get more credit into the economy.
Now everyone knows — every economist knows, and I think an average person if they thought about it would know — that this can’t go on forever. For one reason, there is a concern that inflation would eventually kick up either in terms of the prices for things that you and I buy or in terms of asset values.
So at some point, the Fed is going to have to turn away, with the economic recovery now into its fourth year — with many economists thinking that we’re at least growing and there’s no sign, imminent signs, of a new recession. And in fact, some economists think that growth may accelerate. There is an expectation that at some point, we will see this change in the Fed. That’s why every time Chairman Bernanke makes a presentation before Congress or the public all of his words are parsed to see if there are some indications, some inkling, that the Fed is getting ready to change policy. If they do — if and when they do — that will affect everyone. People will see it in interest rates. People will see it in terms of the availability of credit.”
Category: Economic Perspective