Today’s central bankers are flying blind in one important respect:
they have forsaken the tools of interest-rate targeting for a balance-sheet approach to monetary policy supported by a breathtaking quantitative easing.
Therein lies a serious risk that was not present in the 1970s. Central bankers haven’t a clue about the links between their asset holdings and the forces of supply and demand that are currently wreaking havoc on inflation.
I was part of the staff involved in that regrettable exercise to create the first measure of core inflation, on the team that developed new metrics and wrote brilliant reports that no one ever read.
Aaggregate demand is likely to be far less sensitive to central bank balance sheet adjustments than to the real cost of money, and monetary policy actions have a long lag time.
Inflation is unlikely to peak soon. And it will take far more monetary tightening than financial markets are expecting to avoid stagflation 2.0.
Stephen Roach FT 13 October 2021
A return to 1970s stagflation is only a broken supply chain away
Stephen Roach FT 6 May 2020
Fed Is Behind the Curve on Countering Runaway Inflation Risks, Summers Says
MarketWatch Oct. 12, 2021
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