America is experiencing levels of inflation not seen since 2008. Some economists, like Larry Summers, have warned that, with an accumulated 12-month growth rate of 5 % in the Consumer Price Index, the economy might be at risk of overheating.
With the economy growing steadily and the job market lagging behind, the FED has announced it plans to raise interest rates at the end of 2023, but inflationary pressures may hurry up that raise.
El American spoke with Dr. Geoge Selgin, Director of the Cato Institute‘s Center for Monetary and Financial Alternatives, to get a sense of what is the road ahead for FED’s policy makers and America’s growing concerns of inflation.
The latest report of Bureau of Labor Statistics showed last twelve months set inflation above levels not seen since 2008 crisis. Are we at risk of loosing control over inflation?
The FED’s current policy is to achieve an average infaltion rate of 2 % over some long time period, it has never said how long. If you look the average inflation rate for the last year this value is only approaching to 2 %, it is not above.
So even though most recent number would imply an average inflation of 5 %, the longer average numbers are not exceeding its target. So it is prematurely to worry that the FED isn’t going to control inflation as it’s supposed to. Another way to put it is: the recent high numbers actually are helping to bring the average up to where the FED has said it has to be.
Supply chains all over the world were wrecked during the pandimc. Now we are experiencing shortages of things like semiconductors, gasoline, lumber and even homes. Do you think those shortages are affecting inflation more than FED’s policy?
They have had some effect on inflation and that is another reason why the recent numbers should not sound too many alarms.
When I said the FED isn’t exceeding, it is obviously exceeding it’s goal, yet that is based on the general price index that includes those prices, if you take out some of those prices there’s even less reason to worry that the FED is overexpanding.
So yes, that is another point that should be taken into account, some shortages are contributing to april’s and may’s statistics that people are worrying about.
Dr. Nouriel Roubini recently said that the FED is cornered. What he meant is that even if the FED has some preassure to raise interest rates, the corporate debt is at astoninshing high level. Do you agree with Roubini’s opinion?
I don’t know if it is cornered, but I do belevie there is some danger that when it is time for the FED to start tightening, it’s going to hesitate and may not tighten in a timely fashion because of the implications for the corporate sector, but also for the government, which also has a very large debt burden.
I think people should be concerned about the debt situation, both federal and corporate. It should be a concern that this is going to make it difficult for the FED to tighten when it is time for it to do so. It may not be time yet, though.
The problem here is that the FED’s target it’s so vaguely specified that we won’t know right away wether FED’s being timid or not. We can’t tell wether it is failling to do what it promised to do, because we don’t have a sufficiently claer indication of its policy. But at some point if it doesn’t raise rates and tapers debt bonds purchase, I think it will be clear that fiscal and other considerations might be affecting its decision making.
Do you think there is a risk of another Taper tantrum, as we experienced in 2013, if FED decides to raise interest rates sooner than expected?
Unfotunatetly is posible mainly because of the bond markets. The Fed has given the bond dealers reasons to suppose they won’t be tapering any debt buying soon and they also said back in 2020 : “oh we don’t expect raising interest rates until 2023 and even 2024”.
So the markets are perhaps less prepared that they should be for the FED start tapering or tightening even this year, and therefore they coud respond with something of a tantrum.
I think the FED is trying to alter the market expectations to avoid the tantrum. It is prepareing people psicologically now. But It is not clear wether the market really belive it’s going to do it soon.
Do you think inflation experienced by american economy is transitory or it will last for a while?
I don’t think those numbers of 5 % will last, we are not going to have 5 % inflation for any extended period now. But in the future if the FED does not raise interest rates enough, we could see high inflation, but there is no reason to assume that we are going to see numbers that imply 5 % of more annual infaltion.