Soaring Inflation Puts Central Banks on a Difficult Journey
cryptonews.com
Tobias Adrian is the Financial Counsellor and Director, and Christopher Erceg and Fabio Natalucci are Deputy Directors at the International Monetary Fund (IMF)'s Monetary and Capital Markets Department.__________
Central banks in major economies expected as recently as a few months ago that they could tighten monetary policy very gradually. Inflation seemed to be driven by an unusual mix of supply shocks associated with the pandemic and later Russia’s invasion of Ukraine, and it was expected to decline rapidly once these pressures eased.
Now, with inflation climbing to multi-decade highs and price pressures broadening to housing and other services, central banks recognize the need to move more urgently to avoid an unmooring of inflation expectations and damaging their credibility. Policymakers should heed the lessons of the past and be resolute to avoid potentially more painful and disruptive adjustments later.
The [US] Federal Reserve, Bank of Canada, and Bank of England have already raised interest rates markedly and have signaled they expect to continue with more sizable hikes this year. The European Central Bank recently lifted rates for the first time in more than a decade.
Central bank actions and communications about the likely path of policy have led to a significant rise in real (that is, inflation-adjusted) interest rates on government debt since the start of the year.
While short-term real rates are still negative, the real rate forward curve in the United States—that is, the path of one-year-ahead real interest rates one to 10 years out implied by market prices—has risen across the curve to a range between 0.5 and 1 percent.
This path is roughly consistent with a “neutral” real policy stance that allows output to
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