Stagflation, Not Strong Growth, Justifies Pause

By Gene Sperling | July 3, 2008

It's not an easy time to be a member of the Federal Open Market Committee. You learn in Economics 101 that you tighten interest rates in an inflationary environment and ease on weaker economic demand. When faced with the dreaded "S" word -- stagflation -- there are no sure textbook answers.

So you could hardly fault the FOMC on June 25 for deciding it was best to push the pause button at a Fed Funds rate of 2 percent. With some forecasters now projecting inflation accelerating to as much as 6 percent on price increases in energy, food and other commodities, the Fed could have defended a pause as the best of bad options amid potential stagflation.

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This article was originally published in Bloomberg.