Market participants have been coalescing around the view that the Federal Reserve’s liftoff from near-zero interest rates will be a “one and done” affair.
That is, market metrics suggest that monetary policymakers will likely hike rates once, then wait a considerable time to assess how financial markets and the real economy digest this less stimulative stance.
But in an appearance on Bloomberg Surveillance, Kenneth Rogoff, Harvard professor of economics and public policy, questioned the rationale of this view.
“What is the logic of doing it, also?” he said in response to a question on the merits of a rate hike followed by a long pause. “It’s very asymmetric. If we see inflation, they can start raising rates, and if you go in the wrong direction, it’s harder to do something about it.”
“The models have not been very good for a long, long time since the financial crisis, and why you would want to rely on that and not be more on seeing inflation I don’t understand,” said Rogoff. “After your models have been so off for so long — your ship’s been thrown around in a storm and you don’t know where you are when you land — you kind of want to see the inflation more than usual.“
He´s getting better with age. In July 2008 he was adamant:
Of course, today’s mess was many years in the making and there is no easy, painless exit strategy. But the need to introduce more banking discipline is yet another reason why the policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom. For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies. In policymaker’s zealous attempts to avoid a plain vanilla supply shock recession(!), they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn.
So, the “capsizing” of the economy that was just beginning when he wrote was the fault of “too easy” monetary (and fiscal) policy!
But just a few months later, in February 2009, he turned into an “inflation lover”:
Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation,” he told the Central Banking Journal
Which just goes to show that we should stop talking about inflation. It´s a tricky and inneficient target to have. Concentrate, instead, on pursuing Nominal Stability (through level targeting NGDP, for example)