Martin Feldstein: The Inflation Might Pick Up

Martin Feldstein, the former president of the National Bureau of Economic Research, have been interviewed by CNBC about the Fed policies, inflation and the minimum wage. Feldstein considers that inflation is going to appreciate soon, taking into account that the Fed is planning to move up the interest rates.

“The question is how rapidly will they move? From 0 to 25 basis points, that’s not going to do very much. We’re going to be looking at a fed funds rate, [...] If you look at the statements of the Fed, if you look at some of the speeches, the general tone is we’re going to stay low for a very long time, because there is so much slack in the economy. And it’s a real dilemma for them. They want to deal with the high unemployment rate of people who have been out for a long time or on temporary jobs rather than full-time jobs” Feldstein said.

At the same time, currently, the monthly inflation rate stands at around 2%, while over the past year, the rate has amounted to 1.25%-1.50%, which is reaching the Fed’s target level, and might continue to edge up, Feldstein added.

Investors and banks are also taking big risks, trying to reach the yield, which means that they might take bad loans or take on low quality borrowers, which might be dangerous, even though this danger has not yet showed up. However, Feldstein considers that if the economy softens, “we could see some of those bad loans and bad decisions about investing could actually come home to roost.”

Regarding the minimum wages, Feldstein stated that they might be helpful for low skilled people get on the job ladder. In order to help people to increase their living standards, the government should try to remove the barriers that prevent people from earning money. In this way, introducing welfare and minimum wages might be a step to help people get richer, Feldstein concluded.

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