Just listen to what he says and take the opposite course!
In July 2008, just as the economy was positioning to “dive from the cliffs of Acapulco”, Glenn Hubbard, a Jeb Bush economic advisor, thought the economy would improve, inflation would climb, the dollar would fall and commodities would continue to rise! All those things due to the Fed´s “easy policy”:
As with its new arrangements to augment liquidity, the Fed has aggressively reduced the federal-funds rate, with especially bold action in the past few months. The lower funds rate may augment collateral values, a key issue in the present crisis. But while this action may reduce credit stresses and downward pressure on asset prices, it is decidedly not in line with the Fed’s stated long-run inflation objective of 1% to 2%.
We have been down this road before. In the aftermath of the 2001 recession, the Fed maintained the federal-funds rate below the rate of inflation even after the pickup in aggregate demand following the 2003 tax cut and the economy’s recovery. The failure to normalize rates in a more timely way contributed both to house-price appreciation and to inflationary pressures. By contrast, the Fed’s policy normalization in the mid-1990s built the Fed’s inflation-fighting credibility without damaging the continued recovery from the 1990-1991 recession.
The current policy stance of holding the federal funds rate at 2% will keep monetary stimulus in place. With inflationary expectations not declining, this stimulus will almost surely raise inflationary expectations as the economy improves. This consequence can be seen already in surging commodity prices and the weakness in the foreign-exchange value of the dollar.
It is worrisome that the Fed’s own 2008 projections have risen over the year both for headline inflation (by about 1.5 percentage points) and core inflation (by about 0.2 percentage points). Furthermore, the Fed’s projections of receding inflation in 2009 and 2010 coming true will almost surely require increases in the federal funds rate.
A continuation of a negative real federal funds rate and the increase in money growth accompanying it raises the risk of increasing inflationary expectations, a costly mistake to fix.
He had no inkling that the Fed was making the opposite mistake!