Must-Read: Financial Times: The needless urge for higher borrowing costs
Must-Read: The Financial Times is woke: it has joined the Left Central bank Opposition:
Financial Times: The needless urge for higher borrowing costs: “Talk of ‘normalising’ interest rates betrays a mistaken belief… https://www.ft.com/content/b752f7dc-4782-11e7-8d27-59b4dd6296b8
…Central banks are supposed to be targeting inflation, which remains stubbornly low, its relationship with the apparent tightness in the economy showing few signs of replicating its historic pattern. On the Fed’s preferred “core” measure… annual inflation was 1.5 per cent in April…. In the eurozone… the ECB’s own projections show the core rate at 1.1 per cent this year. In this context, the apparent determination of the Fed in particular to press on with interest rate rises looks a little peculiar. Having created expectations that it was likely to tighten policy with three quarter-point increases over the course of 2017, the Fed is acting more like a party to a contract that feels the need to honour its terms, than a central bank that takes the data as it finds them. Fortunately, there appears to be more resistance to the danger of premature tightening at the ECB….
There are two mistaken ideas at the heart of the urge to tighten policy too quickly. The first is that interest rates need “normalising”, as though there were an eternal and fixed level of equilibrium real rates. The evidence that the real rate has substantially lowered, even before the global financial crisis, is strong. The second is the belief that the output capacity of the economy, measured by the unemployment rate or by other metrics, is sufficiently well known that a central bank can safely raise rates on the basis of gross domestic product growth or increases in employment before it sees inflation start to rise. The history of the past few years, where inflation has continually undershot expectations despite recoveries in the major economies, suggests otherwise….
The Fed… the ECB… both betray, at least in some quarters of those institutions, a misguided approach to monetary policy that ignores recent experience in favour of a default expectation that the future will be like the past.