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Is the central bank thinking about inflation properly?

The Fed defines its inflation target in terms of consumer prices, such as those we pay for cars, toothpaste and haircuts. 

But in recent decades, prices have often climbed much faster for investment assets, such as homes and stocks, and twice led to booms and busts followed by recessions.

Perhaps not coincidentally, two of the last three U.S. recessions were driven by asset price bubbles—a tech stock boom in the late 1990s and a housing price boom in the 2000s—that caused economic imbalances even though consumer prices made barely a peep.

“Nobody knows what’s going to happen,” Nancy Davis, founder of Quadratic Capital, a $1.5 billion investment management fund said, “especially the economists.”

WSJ 21 February 2021


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