A customer buying meat at a Costco store in Novato, California, May 24, 2021.
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Inflation may seem like a problem to be resolved, according to a warning from Deutsche Bank economists, but it is likely to persist and lead to a crisis in the coming years.
Deutsche Bank’s focus on stimulus, ignoring inflation concerns, is a mistake, if not in the near future, in a forecast that is far from policymakers and Wall Street agreements. Issued a miserable warning.
The analysis specifically points to a new framework in which the Federal Reserve Board of Governance allows high inflation for a complete and comprehensive recovery. The company argues that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have dire consequences.
Deutsche Bank Chief Economist David Volkelz-Landau and colleagues wrote that “the delay will result in greater disruption to economic and financial activity than if the Fed ultimately took action.” “In turn, this can cause a significant recession and a chain of financial difficulties around the world, especially in emerging markets.”
As part of our approach to inflation Fed does not raise interest rates Or reduce the asset purchase program until “significant further progress” is seen towards that goal. Comprehensive goal.Multiple central bank officials Not close to those goals..
On the other hand, the consumer price index Personal consumption expenditure The price index is well above the Fed’s 2% inflation target. Policymakers say the current rise in inflation is temporary and will be mitigated if supply turmoil and fundamental implications from the early months of the pandemic crisis diminish.
The German team disagrees with this, with aggressive stimulus and fundamental economic changes anticipating inflation and not ready for the Fed to deal with it.
“It may take a year longer by 2023, but inflation will reoccur.
Patience is due to the fact that the Fed’s priorities are shifting to social goals, and ignoring inflation puts the world economy on top of time bombs.
Indeed, economists do not widely support Germany’s position.
Most people on Wall Street agree with the Fed’s view that current inflationary pressures are temporary and do not expect policy changes to take place soon.
Goldman Sachs Chief Economist Jan Hatzius said there was a “strong reason” to support this position. One that he mentions is the possibility that the extension will expire. Unemployment benefits Relieve wage pressure by returning workers to their original jobs within the next few months.
Regarding general price pressure, Hatius said that many of the current spikes are caused by “the unprecedented role of outliers,” lowering levels and bringing them closer to normal.
“All this suggests that Fed officials can stick to their plan to move away from the current accommodative policy stance only in a very gradual manner,” Hatius wrote.
In the German view, that is a mistake.
Congress has so far approved more than $ 5 trillion as a pandemic-related stimulus, and the Fed has nearly doubled its balance sheet to just under $ 8 trillion through monthly asset purchases. The stimulus package is expected to grow at a pace of about 10% in the second quarter, and An average of 478,000 jobs were added each month In 2021.
“We have never seen such a collaborative fiscal and monetary policy, even if production exceeds potential,” said Forkers-Landau. “That’s why this inflation is different.”
The Deutsche team said future inflation could resemble the experience of the 1970s. Inflation has averaged close to 7% over the last decade, reaching double digits at various times. Soaring food and energy prices following the end of price controls helped boost inflation during the era.
Fed Chairman Paul Volcker at the time led efforts to curb inflation, but had to make dramatic rate hikes that triggered a recession. The Deutsche team is concerned that such a scenario could occur again.
“Already, many factors of price increases have permeated the US economy. Even temporary on paper can affect expectations as much as they did in the 1970s,” they said. .. “The risk is that even if it’s only been implanted for a few months, it can be difficult to contain, especially if it’s very irritating.”
The company said rising interest rates could “cause turmoil in a debt-rich world,” especially in emerging markets where growth cannot overcome rising funding costs.
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Deutsche Bank warns of rising global “time bomb”
Source link Deutsche Bank warns of rising global “time bomb”