The world economy will have to live with higher borrowing costs as the US hunkers down to an extended bout of inflation-busting. Emerging economies that rely on US consumption to support their growth will have to come to grips with some of its demand destruction.
This is the Daily Edit from the economic times. It's August 29. And we put the focus on Powell and how the Fed chief is invoking the Volcker playbook for his war against inflation.
US Federal Reserve Chair Jerome Powell statements last Friday at the annual central bankers conference at Jackson Hole in Wyoming that the US economy will need high interest rates for some time draws on the experience of Paul Volcker in the 1980s. When a single misstep, Volcker cut rates on initial signs of easing inflation, led to an extended spell of painful monetary tightening. Powers hawkishness is fed by that history of entrenched inflation. All the Volcker did eventually bring prices to heel powers position that the Fed will have to keep at it and the economy will have to grow below trend for a while, also reverses his own misstep in assessing the nature of the current spell of inflation. The feds narrative is changing after its foresight and response have come under question. Aggressive central bankers may find their armory to battle inflation in adequate unless government start tightening budgets. inflationary pressure could in fact build if quantitative tightening is not accompanied by a restoration of the fiscal balance. The US budget deficit is at a historical high and raising interest rates could feed into inflation as the economic cools down. This dilutes criticism over the Feds delayed policy response, which may have been counterproductive during fiscal expansion. The effects of tight monetary and loose fiscal positions are more pronounced on growth than on inflation. The Joe Biden administration may have to squeeze spending faster to avert stagflation, the world economy will have to live with higher borrowing costs as the US hunkers down to an extended bout of inflation busting emerging economies that rely on us consumption to support the growth. We'll have to come to grips with some of its demand destruction. Globally assets are headed for repricing as capital flows out of equities and into advanced economic debt. The risk of a stubborn US labor market flagged by IMF in its latest World Economic Outlook is materializing. Powell in his speech admits us job losses have to be brought forward.
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