Fed Faces Three Uncomfortable Truths
IMF deputy head, Gita Gopinath, recently highlighted three uncomfortable truths:
- Inflation is taking too long to get back to target.
Financial conditions may not be tight enough and sustained high inflation could make the task of bringing inflation down more difficult.
- Central banks' price and financial stability objectives are conflicting.
Central banks can provide liquidity to struggling banks but are not equipped to deal with problems of insolvency which may be caused by a sharp rise in interest rates.
- We face more upside inflation risks.
The past two decades of low inflation are over and the global economy faces inflationary pressures from:
- On-shoring of critical supply chains;
- Rising geo-political tensions (with Russia, China and Iran);
- Transition away from coal, oil and gas to low-CO2 energy sources (renewables & nuclear); and
- Spiraling demand for critical materials needed to meet the above challenges.
Balancing monetary policy is going to be difficult, especially where prices are under pressure from a number of challenges. We expect central banks to tolerate higher inflation for longer in order to preserve financial stability.
Fed only expects to hit 2.0% inflation target in 2025
Fed Chairman Jerome Powell recently highlighted the above conflict between policies to tame inflation and maintain financial stability. During a recent ECB panel discussion, Powell indicated that he only expects the Fed to hit their 2.0% inflation target for core inflation in 2025...
Quote for the Week
Inflation is always and everywhere a monetary phenomenon.
~ Milton Friedman
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Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.
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