March 14, 2016

The Crisis? Blame the Fed

David Beckworth

Senior Research Fellow
Summary

The Fed is a monetary superpower, affecting monetary conditions across the globe. It needs to better recognize this role and act now with decisive easing.

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In the past six months, the U.S. economy has displayed signs of weakness that have worried many economists. In the last quarter of 2015, GDP growth was just 1 percent. Other indicators such as industrial production, the stock market and expected inflation experienced bouts of outright contractions in 2015. Some economists are even predicting that we are on the verge of a recession. 

Analysts blame a number of things for this economic turbulence, including low oil prices, weak growth abroad and a stronger dollar. But if you look at the effects of U.S. monetary policy around the world — and their repercussions in America — it becomes clear that the ultimate culprit for these economic headwinds lies at home. Through both its policy actions and its written words, the Federal Reserve has mistakenly tightened monetary policy in fear of rising inflation. That mistake has not just hurt the U.S. economy, it is reverberating around the globe.

This week, the Fed has an opportunity to admit its error when the Federal Open Markets Committee meets to set monetary policy. It’s critical that Fed board members understand how their actions are hurting economies around the world, which has a corresponding negative effect on the U.S. Otherwise, the Fed will continue to tighten policy — and the economic recovery will continue to sputter.

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