Paul Krugman had a good piece in yesterday’s blog about the potential for a Fed exit. Basically, he doesn’t think the Fed is even close to exiting highly accommodative policy because there’s no signs of wage inflation. I think he’s exactly right. We’re highly unlikely to see an environment where inflation really surges until we start to see much stronger aggregate demand and wage growth. I don’t see it.
I’d also add that I don’t buy the idea that the exit strategy will begin when we hit nearby unemployment targets. In fact, as I stated in a recent piece, I think we’re much more likely to see the Fed reduce its unemployment targets to reassure the market just how accommodative it will remain. And yes, we might see some taper in 2014, but don’t mistake the taper for tightening.
In fact, I’ll go a step further than Dr. Krugman. I don’t think the Fed’s Zero Interest Rate Policy will end until we’re into the next recession. After all, we’re so deep into the current recovery that it would be extraordinary if we could even make it long enough to get into the part of the recovery phase where Fed policy actually tightens. I think there’s a very high probability that we will actually be at 0% interest rates the next time the NBER officially states that the economy is in recession….