The Fed's gamble

[UpInArms]

http://money.cnn.com/2003/10/06/news/economy/fed/

NEW YORK (CNN/Money) - Is the Federal Reserve closer than ever to raising short-term interest rates? It is, if you believe the market reaction to Friday's news that U.S. payrolls grew in September.

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The biggest reasons for this change, according to many economists -- including Fed Governor Ben Bernanke, an influential member of the Fed's policy committee -- is that the economy hasn't generated enough demand to take up all of its "slack." "Slack," in this case, is the nine million or so unemployed people, the millions more who are underemployed, and a small mountain of production equipment sitting idle in U.S. factories.

As long as these people and equipment are underworked and underused, there will be little upward pressure on prices -- inflation could, in fact, continue to slow down in the coming months, according to Bernanke's theory.

"This time, we're starting with an inflation rate that's too low and heading lower," said former Fed Governor Lyle Gramley, now a consulting economist with Schwab Washington Research. "What that means is the Fed will sit still until such time as it sees inflation start turning up -- which might not happen until late 2004 or early 2005."

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"Slack"???? So are those unemployed people now "slackers"????

[rogerashton]

1. slack -- as in what you get when you push on a string.

n/t

[Carmerian]

2. Those critics are loopy

...if they're truly worried about inflation. We're in one of the craziest disinflationary periods in our entire history. There's almost no upward price pressure at all over large swaths of the economy, and these people are worried about inflation? Jeez, we need some inflation so that businesses can start making profits again and people can start being employed again. I don't know that I'd want the Fed to cause it by raising interest rates (think : stagflation), but it does need to come from somewhere, and soon.