Monday, August 07, 2006

Feldstein on the Fed

In today's Wall Street Journal, my Harvard colleague (and former Ec 10 head) Martin Feldstein says the Fed needs to risk recession to keep inflation under control:
A mild slowing of economic growth is generally not sufficient to reverse rising inflation. That generally requires a sustained period of excess capacity in product and labor markets, with GDP growth falling significantly or even turning negative....

The Federal Reserve has a difficult task ahead. It is understandable that it would like to achieve the soft landing of low inflation with continued solid growth. But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much.