Boston Federal Reserve Bank, Essay Example

An online article on Reuters reports that Boston Federal Reserve Bank President Eric Rosengren has called for efforts to combat low inflation rate which could be as dangerous as high inflation rate. Rosengren is concerned this low inflation rate may result in slow economic recovery, on the patterns of Japan and now in Europe. He warned low inflation rate may lead to deflationary thinking among consumers and investors (Schneider).

As I read this article I could not help but marvel at the foresight of famed Nobel laureate Paul Krugman who in his April 2012 article had criticized the right for calls to combat inflation. Krugman had argued in that article that a little more inflation is actually preferable and Fed’s concern should be unemployment rate and not inflation rate. Krugman had also argued that a little more inflation may encourage consumers to spend more (Krugman).

It is not difficult to see the wisdom in Rosengren’s call which Krugman explained in his article. Low inflation rate leads to deflationary thinking which means consumers and investors expect prices to further decline. As a result, they scale back spending. But expectation of reasonable inflation leads to higher spending levels. This in turn helps the economy grow and further boost employment levels. Rosengren is concerned low inflation rate may discourage spending levels, thus, wants the Fed to take measures to achieve relatively higher inflation rate. As a result, it may make sense to keep interest rates low for some time to come so that businesses and consumers borrow more to fund their consumption and investment activities.

Work Cited

Krugman, Paul. Not Enough Inflation. 5 April 2012. 10 November 2014 <http://www.nytimes.com/2012/04/06/opinion/krugman-not-enough-inflation.html>.

Schneider, Howard. Fed’s Rosengren says fight for higher inflation should be vigorous. 10 November 2014. 10 November 2014 <http://www.reuters.com/article/2014/11/10/us-usa-fed-rosengren-idUSKCN0IU2B820141110>.