Macroscope | The US Federal Reserve can’t risk a return to the high inflation of the 1970s and 1980s

Niggling fears over economic growth remain but with supply chain constraints still severe and energy prices that could spiral upwards under the threat of war in Ukraine, the Fed is right to raise interest rates as soon as possible

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Edwin Lopez sorts money in the cash register at Frankie’s Pizza in Miami, Florida, on January 12. Inflation has soared to a 39-year high in the US. Photo: AFP

Published: 5:45am, 1 Feb 2022

It is any central banker’s worst nightmare – wondering whether their monetary actions may have whipped up a storm of needless inflation risks. With global interest rates so low and the world economy on a robust recovery, it’s no wonder markets are so concerned that we may be heading back to the bad old days of high inflation seen in the 1970s and 1980s.

Supply-chain constraints, sharp energy price rises and niggling economic fears have all added to the dilemma of whether monetary policy is running too hot or too cold after the 2020 downturn.

There is no easy answer to where interest rates should be right now. We may not be heading into a hyperinflation catastrophe, but the old hype about the end of inflation now looks wildly premature. Inflation is coming back, interest rates are heading higher and the world just has to get used to it.

With US economic growth surging by 6.9 per cent year on year in the final quarter of last year, much higher than expected, it is no surprise that the US Federal Reserve’s patience has finally run out – especially with US consumer price inflation also surging by 7 per cent in December.

Near-zero US interest rates have outstayed their welcome and Fed chairman Jerome Powell has put the markets on short notice that higher rates could be on the cards as early as March.

In the Fed’s view, the odds are shifting towards inflation becoming more entrenched rather than transitory, especially with employment prospects bouncing back.

.css-1m2rp1p{color:#34b8b5;}Macroscope | The US Federal Reserve can’t risk a return to the high inflation of the 1970s and 1980s

Macroscope | The US Federal Reserve can’t risk a return to the high inflation of the 1970s and 1980s