When will the Fed shift?

Date posted: May 4, 2011

The Federal Reserve has been doing its part to boost the economy by keeping key interest rates low and printing money. But some say the Fed will eventually have to shift away from this policy. Why would they do this, and what would it mean? N.C. State University economist Mike Walden explains.

“Well, here’s the way to think about this. … The Congress has given the Fed two enemies. One enemy is slow economic growth; the other enemy is high inflation. The Congress has said (to) the Federal Reserve, ‘Work on both those enemies. Work on the slow growth as well as work on the high inflation.’

“Now over the last couple of years, the Fed hasn’t had to worry at all about inflation. It has been low, in fact. In 2009 we actually had deflation. So the Fed has focused all its attention on trying to increase the rate of economic growth and increase jobs.

“Now, however, I think most people know that inflation is beginning to become a problem. In February we saw the annualized inflation rate go up to 6 percent. So the question is, When will the Fed have to shift its attention to its second goal and direct its focus on inflation? And the problem here … is that sometimes the Fed can’t do both. In fact, one set of policies, for example, designed to reduce inflation may be the policies that you would not want to have to try to increase economic growth.

“When will the Fed shift? Right now, the Fed gives no indication what so ever that it’s going to shift. The European Central Bank, the Fed’s counterpart there, has already begun a shift. Most economists think our Fed won’t shift probably for another year.”

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