With no bubbles or inflation, Fed will keep rates low: Dean Baker

November 8, 2016 1:35 PM EST

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NEW YORK (Reuters) - Economic conditions warrant continued low interest rates and an aggressive approach to tackling wealth inequality, which will be a top challenge for the next president, according to economist and author Dean Baker.

Baker, the co-founder of the Center for Economic and Policy Research, joined the Global Markets Forum on Tuesday, election day in the United States, to discuss economic challenges that the next president will face. He believes Hillary Clinton will win the election.

Following are excerpts from the full conversation.

Q: Assuming a Clinton victory, what action do you expect from the next president in tackling the wealth gap?

A: A Clinton victory seems pretty certain to me based on the polls. She can make currency a top priority in trade negotiations, placing it above things like copyright/patent enforcement and access to financial markets. This will reduce our trade deficit and create manufacturing jobs.

She can also start to move away from patent financing of pharmaceutical R&D using some NIH funding for clinical testing, with approved drugs being sold in the free market at generic prices. There are hundreds of billions at stake in this one.

Q: Markets have priced in a rate hike next month. Will monetary policy stay relatively loose for over the next four years?

A: I assume that the Fed (with Clinton appointees) will keep interest rates low until there is clear evidence of accelerating inflation. There is not now. This is the simplest way to benefit low- and moderate-income households -- don't keep them from getting jobs.

If they are a bit slow to react, and inflation hits 2.5 percent or even 3 percent, so what? I just don't see any big consequence to inflation being modestly higher than target. There are enormous consequences for 1 to 2 million people being needlessly unemployed.

Q: Are regulations stifling the U.S. economy to the point that low rates cannot have an effect on the velocity of money?

A: It's very hard to see the case for the regulations of the Obama years being especially harmful. People have complained about the ACA (Affordable Care Act), but there is essentially zero evidence that the businesses that would be newly hit by its mandates are doing worse than other businesses.

The Dodd-Frank reforms were very modest and have not increased spreads between Treasury rates and other borrowing rates. The minimum wage has actually fallen by more than 10 percent in real terms under Obama, so it's hard to see what "job-killing" regulations people can have in mind.

This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For more information on the forum, and how to join the conversation, follow this link: https://forms.thomsonreuters.com/communities/

(Reporting By Chris Kaufman; Editing by Alan Crosby)



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