US Federal Reserve chair Jerome Powell’s statement last Friday at the annual central bankers’ conference at Jackson Hole in Wyoming that the US economy will need high interest rates for some more time draws on the experience of Paul Volcker in the 1980s when a single misstep – Volcker cut rates on initial signs of easing inflation – led to an extended spell of painful monetary tightening. Powell’s hawkishness is fed by that history of entrenched inflation, although Volcker did eventually bring prices to heel.
Powell’s position that the Fed will have to keep at it – and the economy will have to grow below trend for a while – also reverses his own misstep in assessing the nature of the current spell of inflation. The Fed’s narrative is changing after its foresight and response have come under question.
Aggressive central bankers may find their armoury to battle inflation inadequate unless governments start tightening budgets….
