The Perils Of Leaving Interest Rates Low

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Sy Harding

The recession held inflation in check, currently around the Fed’s comfort zone of 2% in the U.S. The Fed says it is confident that inflation will remain under control if it leaves interest rates low for “an extended period” even though the economy is recovering again.

It’s an important decision, since history shows that once inflation is out of the bottle it’s very difficult to get it back in. So after the devastating runaway inflation of the 1970s, central banks have made sure that if they err it is on the side of raising interest rates early, at the first whiff of inflation fumes, to make sure most of it remains in the bottle.

The current fragility of the global economic recovery makes it difficult this time for central banks to raise interest rates early to ward off inflation, since to do so could stall the economic recovery--but the threat of inflation may force their hands.

Already, central banks in Europe and Asia are more worried about inflation than is the U.S. Federal Reserve.

The Perils Of Leaving Interest Rates Low

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