A hard landing and a return to lower inflation, or a stagflationary scenario
We now know that Team Persistent won the 2021 inflation debate
With inflation surging close to double digits, the US Federal Reserve and other central banks have conceded that the problem is not transitory, and that it must be urgently addressed by tightening monetary policy.
That has spurred another big debate: whether economic policymakers can engineer a “soft landing” for the global economy
The Fed and other central banks contend that they will be able to raise their policy rates by just enough to pull the inflation rate down to their 2% target without causing a recession.
A soft-landing scenario looks like wishful thinking.
Simply put, the effort to fight inflation could easily crash the economy, the markets, or both. Already, central banks’ modest amount of tightening has shaken financial markets
Yet if central banks wimp out now, the outcome will resemble the stagflationary 1970s, when a recession was accompanied by high inflation and de-anchored inflation expectations.
That leaves either a hard landing and a return to lower inflation, or a stagflationary scenario.
Either way, a recession in the next two years is likely.
Nouriel Roubin Project Syndicate 26 May 2022
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