Two of the world’s foremost central bankers reinforced their positions on the potential for damaging inflation in the wake of the coronavirus pandemic on Wednesday, saying in no uncertain terms that they simply don’t see it.
Why it matters: This is exactly what former Treasury Secretary Lawrence Summers warned about in his recent op-ed in the Washington Post, citing the potential for “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
What they’re saying: “I don’t think we are worrying about reflation and it’s going to be a while before we worry about inflation,” European Central Bank president Christine Lagarde said in a webcast interview. “If you consider how far we are from our goal…we are very far away.”
- “As we look forward, we will probably see an increase in [inflation] readings. That is not going to mean very much. It will not be larger or persistent,” Fed chair Jerome Powell said during a separate webcast interview hours later.
What it means: Previous central bank leaders were primordially concerned with the possibility of inflation creeping higher and would raise interest rates at the first sign of price pressures.
- Having examined more than a decade of stubbornly low inflation, Powell and Lagarde — both central bank heads in their first term who are not trained macroeconomists — are turning their backs on the old way.
What he said: The proposed largess of spending “will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem,” Summers wrote.
- “But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.”
Yes, but: Powell, Lagarde and other central bankers have said that if inflation does arise they have the tools necessary to bring it under control.
Yes, but, but: Given the choice between 1) raising rates to choke off inflation that would send the country into a recession or 2) letting inflation bubble up but keeping rates low to allow asset prices to continue booming and the job market to strengthen, central bankers’ comments and actions in recent years have reasonably sowed doubt in critics like Summers that the former path would be pursued over the latter.
The last word: “Stimulus measures of the magnitude contemplated are steps into the unknown,” Summers argued.
- “For credibility, they need to be accompanied by clear statements that the consequences will be monitored closely and, if necessary, there will be the capacity and will to adjust policy quickly.”
