I attended a webinar yesterday* in which Christopher Waller, a member of the Board of Governors of the US Fed, said inflation is under control (despite a 4.2% annual rate of inflation measured in the past month) and that overshooting the 2% target is good because they undershot the target in the past. He also allowed, however, that he'd be concerned if the economy experienced inflation rates > 4% for several months running. [update: his views were reported numerous places. E.g. See this.]
Keep in mind that the CPI seriously under-includes asset price inflation, such as houses, stocks, cryptocurrencies, etc. Also keep in mind that current labour shortages in many occupations and industries are leading to rising wages and salaries, raising costs for many businesses.
He also said that the Fed has to be reactive, not proactive. No foolin'. I almost fell out of my recliner when I heard that. If the Fed is to be reactive, that means they will wait until the economy actually experiences inflation before doing anything about it. It also implies that they think their forecasting models are garbage.
Meanwhile, the expected rate of inflation is creeping upward, and as that happens, so will interest rates [very roughly, the nominal or stated rate of interest equals about 1.5% plus the expected rate of inflation -- see the Fisher Equation -- all risk-adjusted, of course.].
And as interest rates rise, commercial banks in the US (chartered banks, etc. in Canada) will have a strong incentive to create new loans (i.e. create more money) based on their massive holdings of excess reserves at the central bank.
And as that happens, then the large increases in the money supply will lead to even more inflation.... not hyperinflation, but I can readily imagine average annual inflation rates of 3-6% for quite some time to come.
As I wrote to some friends earlier this morning,
WTF, eh?
This guy is touted in Business Insider for having said last spring that we'd experience inflation in a year or so.My friend, John H, and I were making similar predictions, but nobody seems to be beating down our doors to pay us for our insights.My most recent four or five posts on it all are here in reverse chronological order:... Central banks will have their hands full, trying to keep the genie in the bottle.
- That is a potentially very blunt tool. Raising that rate by even 0.05% will soak up a LOT of excess reserves, creating sizable starts and stops in the macroeconomy.
- As interest rates rise, the interest payments on all gubmnt debts will skyrocket, creating more deficit problems for the future. Yes, all levels of gubmnt will face budget shortfalls (for which most will be only vaguely, at best, prepared).
Hold onto your hats, everyone. We are in for one heckuva ride...
UPDATE: Also see this CBC piece about an interview with David Laidler. He has similar concerns.
UPDATE #2: After I sent this to David (a fellow emeritus from UWO), he wrote back
Yup - in old style movie going, the phrase was "This is where we came in"
UPDATE #3: My friend, King Banaian, devoted an hour of his regular radio programme to this issue, expressing a similar disbelief that two members of the Board of Governors of the Fed plus the president of the St. Louis Fed all said pretty much the same thing.
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*with thanks to the Global Interdependence Center for inviting me to attend their webinars.