The economy — with full employment and sky-high stock markets — is screaming for an interest rate rise. But the US Fed and the ECB have signaled they’re going to cut instead.
Why are we living in a Bizarro World where an overheating economy generates low inflation, and central banks shovel ever more cash into an on-fire market?
US Rep. Alexandria Ocasio-Cortez touched on the issue in a recent hearing: “Unemployment has fallen three full points since 2014 but inflation is no higher today than it was five years ago.”
That’s because we have solved inflation. It is no longer a problem. Macro deflationary forces are more powerful than central bank monetary forces.
The next issue is whether governments will be willing to take advantage of the extra fiscal spending space this historic opportunity presents.
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The economy in Europe and the US is an unusual beast right now. We have full employment, extended GDP growth, and the stock market is through the roof. The S&P 500 has breached 3000, the Dow is at 27,000, and the FTSE 100 is at 7530 — all at or near all-time highs.
Normally, these conditions would be screaming for an interest rate rise. The economy ought to be overheating, inflation ought to be spiraling, wages ought to be going up, along with demand, and employers should be struggling to find extra workers and resources to fill their order books.
But the opposite is happening.
The European Central Bank just concluded that it needs to “be ready and prepared to ease the monetary policy stance further” after failing, again, to goose inflation up to its 2% target.
In the US, Federal Reserve chair Jerome Powell also signaled he will cut rates. “There is a risk that weak inflation will be even more persistent than we currently anticipate,” he told Congress.
So what’s going on? Why are we living in a Bizarro World where a powerhouse economy generates low inflation, and central banks shovel ever more cash into an on-fire market?
The old relationship between employment and inflation is broken
The answer was touched upon by US Rep. Alexandria Ocasio-Cortez, who is turning out to be a surprisingly prolific generator of debates about the fundamentals of economics.
“Unemployment has fallen three full points since 2014 but inflation is no higher today than it was five years ago,” she said in a congressional hearing …read more
Source:: Business Insider