The inflation debate: why team Yellen will move cautiously.

• Author: Berry, John M.

By every measure, inflation in the United States is well under control. The Federal Reserve's inflation goal is for an annual increase of 2 percent in the core personal consumption expenditure price index, which excludes often-volatile food and energy items. In the twelve months ended in March, that index was up only 1.3 percent and shows few signs of accelerating.

Nevertheless, some Fed critics are warning that the central bank needs to quickly and aggressively raise interest rates to head off a surge in inflation. One of them, Harvard University economist Martin Feldstein, warned in a Wall Street Journal article in late March that the Fed needs to act because the nation's unemployment rate had fallen to 5.5 percent, which "has historically been regarded as about the lowest rate that can be sustained without starting an inflation spiral."

Other critics focus on the enormous build-up in commercial bank reserves that historically would have led to a massive expansion of credit for both business and consumer spending and fueled inflation. That risk also demands an immediate increase in interest rates, the monetarist critics insist.

But most top Fed officials, including Chair Janet L. Yellen, maintain that the old rubrics are not applicable given the current state of the U.S. economy. After all, the Fed's target for overnight interest rates has been between zero and a quarter-percentage point for more than six years. Some economists and politicians predicted as far back as five years ago that the low interest rate policy would cause a surge in prices, but that didn't happen.

Now, with economic growth solid enough to bring unemployment down to 5.5 percent from a peak of 10 percent, Yellen and most of the other members of the Federal Open Market Committee have indicated they expect to begin to raise the near-zero target sometime later this year. However, both Yellen and Vice Chairman Stanley Fischer have stressed they plan a "shallow" trajectory for rates, not a rapid series of increases.

Feldstein and other critics say raising rates slowly would heighten the risk of both too much inflation and financial market instability. "The Fed should accelerate its projected rate increases and communicate the new projections explicitly to markets. Unless this is done, the combination of rising inflation and increasing real interest rates may expose the economy to an unnecessary risk of financial instability," Feldstein wrote.

Professor John Taylor of...