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Fed framework holds central bank hostage

The writer is the President of Queen’s College, University of Cambridge, and an advisor to Allianz and Gramercy.

According to old saws, the difference between lawyers and many other professions is that the former can be argued with 100 percent confidence, even if the basis for their views is uncertain or low.

The Federal Reserve Board of Governors these days seems to be acting more like a lawyer than an economist.Once again, it’s set aside Accumulation of evidence Strong economic recovery, resolution of financial stability concerns, and repetition The rise in inflation will be temporary.

In contrast, many economists are not sure or completely worried that inflation will continue. Signs of market bubbles are doubling at “all rallies.” More companies have warned of rising input costs, some suggesting that this will be passed on to prices.

The Federal Reserve stance and all these contrasts are why policy risk is one of the key challenges that investors will navigate this year as they move up the ranks. The debate over keeping an open mind about the rising nature of inflation does not dismiss the structural disinflationary effect of technology.

We also do not deny that the first surge in inflation data is largely related to the underlying effects and the temporary estimates between additional spending and production. Instead, take advantage of structural changes that affect both supply and demand in the economy.

The shortage of aggregate demand that has plagued the US economy for a long time is emerging.The Biden administration is keen to maintain it “growing” Fiscal policy gist and the private sector have been able to consume more from the private savings accumulated during the pandemic, and are now more advanced.

All this is complemented by a shift from economic policy away from spoiling the corporate sector to a more comprehensive approach that favors those who tend to spend most of their income on goods and services.

The resulting surge in demand has come at a time when supply reactions have become less dynamic due to years of underinvestment.Already — and it’s too early — companies are dealing Supply chain bottleneck, Rising commodity prices, industrial concentration, widespread inventory shortages, and in some cases labor problems.

Shortage of chips We have already closed some production facilities. Meanwhile, economists have revised their 2021 growth forecast again, expecting double-digit growth in the second quarter and more than 7% of the year.

In a sense, the Fed has no operational option other than sticking to a temporary explanation given the new financial framework recently adopted. This framework has been incorporated into a delayed “results-based” approach, replacing the more preemptive trends associated with traditional “prediction-based” approaches.

As such, the world’s most powerful central banks have publicly promised that the deviation in actual inflation will have to wait months before responding. To emphasize this point, Fed Chair Jay Powell said the Fed is not even thinking about unstimulated monetary policy, given the view that the economy is “not approaching substantial further progress.” It was. And once you start thinking, it will take enough time to implement the tightening measures.

This framework was designed a few years ago when no one expected the enormous structural changes of today. Today, it holds the Fed hostage and increases the risk of policy mistakes.

Rather than brake carefully like the Bank of Canada RecentlyThe Fed continues to spur the loosest financial position, as recorded in the Goldman Sachs Weekly Index. Market bubbling and excessive risk taking are accompanied by rising inflation, both real and expected. Ultimately, the Fed could be forced to smash monetary policy brakes, at risk of compromising a long-term comprehensive recovery.

In such an economic scenario (in my opinion, it even has odds, if not somewhat high), investors are at risk of losing money in holding both stocks and bonds. They can also be upset if the market begins to tighten in response to the federal government, which is clearly lagging behind the curve.

For quite some time, the Fed has been worried about the balance of risk of deflation. The risk balance has been reversed.

It’s not just when the Federal Reserve Board begins to think about less financial stimulus. It is time to gradually reduce market intervention for the long-term well-being of the economy and the structural health of financial markets.

Fed framework holds central bank hostage

Source link Fed framework holds central bank hostage

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