The Fed should change up its playbook to keep the economy from overheating, BofA says
Fedshould pull back on its ultra-accommodative policy ahead of schedule, BofA economists said.
- The US
economyis hurtling toward a full recovery and will likely exceed its maximum potential GDP next year.
- Keeping rates near zero while the economy runs so hot risks rampant inflation, the bank said.
"Yes, a rapid recovery means a rapid healing of wounds. Clearly we don't want to see a replay of the slow-motion recovery of the last cycle," the team led by
The Fed is currently on track to leave rates at historic lows even as the economy exceeds its potential next year. That stance threatens to let inflation run rampant, the bank warned.Conversely, the slow recovery seen after the Great Recession led to a hot labor market without strong inflation. "We think a shift in the Fed's strategy next year from sole focus on growth to a more balanced focus on growth an inflation is critical to ensuring a more sustained recovery," the economists said.
Bank of America isn't alone in its new outlook. Famed economist
The former CEO/CIO for PIMCO told CNBC the Fed is "pinning itself in a corner" by insisting that inflation is just "transitory," and he wrote in the FT that it won't be able to "cautiously tap the brakes," but will have to slam on the brakes if inflation suddenly climbs out of the Fed's comfort zone. That could undermine "what should be a long-lasting inclusive recovery," El-Erian added.El-Erian argued the Fed is overlooking evidence that the jump in inflation has to do with "structural changes" because the long-running lack of demand in the US economy appears to be a thing of the past. The Fed's current framework was designed long before these structural changes emerged, he said, so the central bank should rethink its approach.
"It's not just time for the Fed to start thinking about less monetary stimulus. It's time for it to taper its
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