The Great Wall of Liquidity around financial markets
Major central banks have lost the plot when it comes to fulfilling their price-stability mandates.
Fed’s monetary-policy stance should be restrictive, not neutral.
The Fed’s balance-sheet tightening is also minimal.
It will take more than seven years to reach the level in early September 2008 ($900 billion), before the Fed erected its Great Wall of Liquidity around financial markets.
In the eurozone headline CPI inflation was 8.1% in May, up from 7.4% in April. Nonetheless, the European Central Bank’s interest rate on its main refinancing operations remains zero, and its deposit rate is -0.5%.
Far from being restrictive, the major central banks’ current stance remains expansionary, with policy rates well below the neutral level (and deeply negative in real terms).
All three are therefore continuing to feed inflation.
The more that longer-term inflation expectations become unanchored, the higher the cost of disinflation will be in terms of lost output and employment.
Willem Buiter Anne Sibert Project Syndicate 9 June 2022
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