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The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high.Indeed, given wage stagnation and the strong dollar, inflation is well below the Fed's own 2 percent target, not to mention the 4 percent rate for which many economists (including the International Monetary Fund's former chief economist, Olivier Blanchard) have argued.In the current circumstances, higher inflation would be good for the economy. There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation. If the Fed focuses excessively on inflation, it worsens inequality, which in turn worsens overall economic performance. Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth, workers' share will be ratcheted down – never recovering what was lost in the downturn.The Fed should simultaneously stimulate the economy and tame the financial markets.
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