We have just learned that the Fed is debating the risks and benefits of letting the US economy run “a little hotter,” balancing the good it could do for workers against the possibility it could end in a recession, Atlanta Federal Reserve bank president Raphael Bostic said Tuesday.
“We do think about this in terms of our tools and how comfortable we should be letting the economy run a little hotter,” Mr. Bostic said in an event at the Washington University in St. Louis.
Fed officials are widely expected to cut interest rates at their upcoming meeting on 31 July in response to the growing risks and uncertainties around international trade, as well as weak inflation in the US.
With the unemployment rate at 3.7% it would be an unusual time for the Fed to loosen monetary policy. But some Fed officials argue that it may be time to try to push the boundaries of what is possible since wages are increasing only at a modest pace, and with no sign inflation is about to escalate. The longer the labor market remains tight, the argument goes, the more the recovery helps minority groups or less successful regions.
“We are definitely having a conversation about this,” as officials consider when and whether to trim rates and by how much, Mr. Bostic said.
The fear is getting it wrong, and creating such a “hot” economy that inflation does surge. Some argue that is unlikely, and note that comparably low unemployment in the mid-90’s continued without inflation because of improvements in productivity.
Productivity growth has been weak in recent years, and Mr. Bostic said there are risks to pushing too far.
“There are risks there. When you are red hot, almost every time a recession ensues…There ends up being a false sense of resilience,” he says.
President Trump disagrees, Chairman Powell on the Hot Seat.