Follow Paul Donovan

Let the Fed do its job

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Global inflation has changed a lot in the last 40 years. In the mid-1970s, G7 countries' inflation was over 14%. Since 1993, G7 inflation has almost never been above 3%.
  • What caused this? It was not globalization. Countries with the biggest increase in trade did not have the biggest fall in inflation. It was not technology. Technology changes the price of one good relative to another. It does not set the general level of prices.
  • G7 inflation fell because politicians let economists do their job. Controlling inflation is not very difficult. Economists know how to do it. The policies to control inflation work. Most G7 central banks became independent over the past 40 years. Policy became long-term and strategic, not about winning elections.
  • US President Trump has tweeted unhappiness that the US Federal Reserve has (correctly) been raising rates. The US does not need very low rates today. The US has above-trend growth, a tight labor market, and a deficit-funded fiscal boost. True, Trump's trade tax increases hurt US consumers and may slow the US economy. That could slow the pace of rate increases, but the Fed still needs to tighten. A serious threat to Fed independence would raise inflation risks and worry markets.