Central bankers don’t know how to fight inflation
A few weeks ago, Jeremy Rudd, senior economist at the Fed, published an article that does little to inspire confidence in policymakers’ ability to prevent stagflation from plaguing their economies. Moreover, one of his findings – that anchoring inflation expectations has little effect on prices – suggests that the current mania of central bankers to raise interest rates may have a cost on the growth without the corresponding benefit of achieving their primary political objective.
Rudd examined a surge in US inflation in the second half of 1960, noting parallels between then and now. It is his assessment of what has been learned in the meantime – or rather, what remains unknown – that is most striking:
Perhaps the most sobering fact, however, is how little practical benefit six decades of additional experience have brought us: our understanding of how the economy works – as well as our ability to predict the effects of shocks and political actions – is on my mind. is no better today than it was in the 1960s.
The current surge in price increases has certainly caught today’s central bankers napping. Last week’s figures showed consumer prices in the euro zone rose at a record pace of 8.1% in May, up from 7.5% the previous month and faster than the 7.8% expected by economists. In the UK, the Bank of England expects inflation to exceed 10% in the coming months. And economists expect the United States to post its fourth consecutive increase of more than 8% on June 10.
It is understandable, if not forgivable, that forward-looking policymakers everywhere are currently providing. “For me, I think a break in September might make sense,” Atlanta Fed President Raphael Bostic said May 23. Contrast that with Fed Governor Christopher Waller’s comments last week that “I support policy tightening another 50 basis points for multiple meetings,” and the path for at least the next three central bank decisions. is as clear as mud, as Jim Bianco of Bianco Research alluded to in a tweet:
ECB President Christine Lagarde has tried to clarify financial markets’ plans for what her institution is considering, pledging last month to raise interest rates by a quarter point in July and again to raise interest rates. ‘by the end of the third quarter. This would bring the bank’s deposit rate down to zero, from -0.5%.
But Dutch central banker Klaas Knot and Slovak policymaker Peter Kazimir refuse to rule out half-point increases, while Austrian central bank chief Robert Holzmann said on Friday that “a 50-point increase basis would send the necessary clear signal that the ECB is serious about fighting inflation.
Given last week’s surge in inflation, Lagarde could find himself overwhelmed by the hawks of the board of governors in the coming months, even if the self-imposed desire to stop bond purchases before rising borrowing costs means this week’s decision is likely to remain a non-event.
Rudd’s April 9 research note echoes a paper he published in September in an attempt to debunk the idea that expectations drive inflation, a proposition he called “absurdity. “. His most recent work questions how effectively policymakers can expect to respond to unforeseen – and arguably unpredictable – changes in the economy:
Perhaps the most useful lesson to be learned from the inflation experience of the 1960s is how difficult it is to carry out economic policy in the real world and in real time. Policy-making takes place on a ‘dark plain’, and its practitioners – as well as those who seek to advocate an alternative path – will invariably be burdened with a very flawed understanding of how the economy works; noisy and subject to revision; and outcomes that cannot even be specified in advance, let alone be assigned a credible probability weight. Of course, decision-makers face an additional burden that these others do not have: they are the ones responsible for making consequential decisions, and they are the ones who are held accountable for outcomes.
If major economies collapse into stagflation, policymakers will not have done their job. However, as tempting as it may be for some politicians, questioning their independence to set monetary conditions would be a bad reaction.
More from Bloomberg Opinion:
• ECB removes strategic ambiguity on rate hikes: Marcus Ashworth
• The Bank of England take away. Rishi Sunak should give: Mark Gilbert
• Memo to Fed: Hurry up and walk so we can slow down: Daniel Moss
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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. A former London bureau chief of Bloomberg News, he is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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