Was the US Central Bank right to delay a planned rise in interest rates? The increase was anticipated to beat down inflation before it got out of hand. Instead, Chairwoman Yellen and her team “wimped out.” Let’s provide some context first. Following the banking crisis that resulted in the 2008 recession, The US Federal Reserve engaged in unprecedented monetary stimulus through buying bonds, driving real and nominal interest rates to historic lows. Most GOP commentators forecasted high inflation because all else equal that much monetary stimulus should have driven inflation into the double digits. Many business leaders accepted these projections as fact. The fear still hangs over us. Those inflation projections were flat out wrong. Why? Because the “all else equal” condition did not hold true. Banks used extra reserves to build up capital rather than lend, preventing the Fed’s bond-buying action from…
On CNBC’s “The Call”, I Disagreed with Supply-siders Predicting Higher Inflation
I had occasion yesterday to be on The Call, a CNBC television show hosted by economist Larry Kudlow. Like other supply-side economists, Kudlow follows Milton Friedman in assuming that the inflation rate is driven solely by monetary policy. My topic as a talking head: Where is inflation headed in the US? Inflation matters because it affects the stock market, interest rates and our real wealth and income. I think horse racing is a good analogy for inflation predictions. A lot of people are betting on the horse called inflationary expectations: the Federal Reserve’s monetary stimulus will create higher inflation rates so let’s build that expectation into today’s interest rates and prices. Another horse is medical costs: pharmaceutical companies and health care providers are raising rates in anticipation pricing pressures once the Democrat’s national health care policy is enacted. Yet another horse is energy…