Term report

THE Federal Reserve has long acknowledged trade-offs in its efforts to revive growth with ultra-easy monetary policy. Now those trade-offs are getting starker. On April 26th America’s economy was reported to have grown by 2.5% on an annualised rate in the first quarter: stupendous by European standards, but less than expected. On April 29th underlying inflation slipped to just 1.1%. On May 1st the Fed duly said it would keep rates near zero, as it has since 2008, and keep buying $85 billion of government bonds a month, although it may vary the pace depending on the outlook for inflation and jobs.

A prolonged period of low rates carries the risk of asset bubbles. In its annual report issued on April 25th America’s new Financial Stability Oversight Council (FSOC), a watchdog that includes the Fed, warned that a “sudden spike in yields and volatilities could trigger a disorderly adjustment, and potentially create outsized risks.” For its part, the IMF noted in its latest “Global Financial Stability Report” that “credit markets…are maturing more quickly than in typical cycles.”