BERKELEY – Inflation in the United States is lower than it was a year ago, and substantial economic weakness elsewhere is driving other central banks toward interest-rate cuts. With little empirical basis to believe that US monetary policy is not restrictive, I continue to believe that in 18 months, the US Federal Reserve will have wished that it had started cutting rates in January 2024.

If I am right, the US is not headed for a soft-landing path; it is already on the runway, albeit with a monetary-policy rudder steering sharply toward contraction, rather than being held in a straight-ahead neutral position. Yet many commentators and Fed officials continue to believe that interest rates should remain at their relatively high levels, because they are fixated on the 1977-79 period, when a near-stabilized inflation rate spiraled out of control.

Back then, the Carter administration’s nominal GDP forecast had been dead-on, real growth came in two percentage points low, and inflation came in two percentage points high. Then came the Iranian Revolution and the second major oil-price spike of the decade, leading ultimately to the “neoliberal turn,” the Volcker disinflation (when the Fed hiked rates to 20%), and Latin America’s “lost decade.” To those who worry that history will rhyme, keeping interest rates too high for too long is a risk worth taking.

QOSHE - The Threat of Trumpflation and a Fed War - J. Bradford Delong
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The Threat of Trumpflation and a Fed War

34 14
22.05.2024

BERKELEY – Inflation in the United States is lower than it was a year ago, and substantial economic weakness elsewhere is driving other central banks toward interest-rate cuts. With little empirical basis to believe that US monetary policy is not restrictive, I continue to believe that in 18 months, the US Federal Reserve will have wished that it had........

© Project Syndicate


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