October 2, 2022

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Team Transitory Is Back Warning Big Rate Hikes Are a Big Mistake

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(Bloomberg) — ‘Team Transitory’ hasn’t given up hope of winning the great inflation debate. 

That was the tag given to everyone — from Federal Reserve Chair Jerome Powell on down — who expected pandemic price-spikes to be shortlived. With inflation still breaking records all over the world, they essentially lost that argument.  

But there remain plenty of economists who argue that the shock will soon fade, as supply blockages ease and energy costs stabilize. Some warn that central banks are in danger of making a big mistake by raising interest rates too aggressively even as price pressures show signs of peaking. 

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With inflation now exceeding 8% in the euro area, and expected to stay above that level in the US when May data comes out on Friday, here’s a roundup of some of the main arguments laid out by Team Transitory 2.0.

Too Tight?

Central banks argue they can raise interest rates at a pace that allows their economies to achieve what’s known as a soft landing. Skeptics say they’ll tip their economies into recession by tightening too much, with inflation likely to undershoot targets again as a result. 

History illustrates the risks: The European Central Bank in 2011 raised borrowing costs only to be forced to reverse them later that same year while the Bank of Japan in 2006 raised rates and had to unwind that move in 2008.   

Read more: Fed’s Mild Inflation Forecasts Need Explaining: Bill Dudley

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Inventory Glut 

Ongoing supply…

Bloomberg News

2022-06-05 18:01:16

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