Gerald Baker in today’s Financial Times describes the renewed debate within financial circles about whether it is time to tighten US monetary policy, and weighs in against “sado-monetarism”.
Baker says “a deviancy popular among certain central bankers and commentators in the 1980s, is out of the closet and back in respectable living rooms.” Advocates of a rate hike, most notably the Economist and Wall Street analyst Stephen Roach, think the threat of deflation has passed, but worry that the excessive liquidity pumped into the US economy since the 2000-01 recession is creating another bubble and the potential for a global financial crisis. The accompanying Economist article notes that with growth at 4%, the Federal Reserve now has room to constrict demand, arguing for the use of GDP rather than inflation to gauge monetary policy. Baker reflects the Fed position when he cites continuing excess capacity, widespread unemployment, and a falling core rate of inflation as evidence “the keening for a tightening of monetary policy now is misplaced”, and would tip the US economy back into recession - or worse. Articles available on www.supportingfacts.com Sorry for any cross posting.
