QE Didn’t Quite Cut It, So Now What?

Members of the Federal Reserve Board of Governors don’t usually share their differences in public. On Oct. 11 the board’s vice chairman, Stanley Fischer, said in Lima that he expects a hike in the Fed’s main rate “later this year,” confirming what Chair Janet Yellen had said in September. Within two days, Lael Brainard and Daniel Tarullo, both on the board, said the Fed should wait because there wasn’t yet any sign of inflation. That disagreement shows the dilemma Yellen faces: Raise rates soon and risk smothering a tepid recovery, or wait until next year and risk igniting inflation.

Congress gave the Fed two jobs: Keep inflation predictable and unemployment low. In the past, as unemployment went down, inflation went up. Fed hawks argue that, with unemployment at 5.2 percent, inflation is on its way. Doves say that relationship isn’t what it used to be. There’s a third argument: We don’t really know how well the last seven years of Fed policy have worked. And if the central bank can’t be sure of what happened in the past, it will find it hard to decide on the future.