Macroscope | The US Federal Reserve and other central banks must be proactive on inflation, but not overreact
- In favouring shock therapy to contain inflation, the Fed and other central banks that appear to be following suit on tougher policies risk a harder landing for their economies
- Should central banks act with impunity and expect governments and taxpayers to pick up the tab for all the damage wrought by recession?
But, is it their remit to push economic activity back into recession, with its implied toll on business output and employment? Should central banks act with impunity and expect governments and taxpayers to pick up the tab for all the damage wrought by recession? It may be time for central banks to have a heart and avoid policy overkill, for the sake of global welfare.
Of course, the Fed is deeply rattled about core inflation jumping to 6.3 per cent in August from 5.9 per cent in July, despite the headline consumer price inflation rate easing to 8.3 per cent, from 8.5 per cent, over the two-month period. The Fed must be proactive, but it shouldn’t overreact.
The worry for the Fed is that elevated inflation perceptions are becoming embedded in a psychology of rising prices, which could easily turn into a vicious wage-inflation spiral.