Prudence and predictability are not exactly plentiful in President Trump’s Washington. But sometimes there can be too much of these virtues, and that is the danger confronting the Federal Reserve under Janet Yellen.
To see why this is so, start with some quick history. For half a century after World War II, U.S. recessions came about because spending grew faster than production, inflation picked up, and the Fed had to raise interest rates and choke growth to force inflation down again. That changed in the 1990s. Globalization and technological advances put a lid on inflation: Cheap imports restrained prices; the ability to replace workers with machines checked wages. Meanwhile, the Fed under Alan Greenspan convinced everyone that inflation had been permanently vanquished, which further dampened the old habit of marking up prices.