Pandemic government spending, labour shortages, rising gas prices, and supply chain bottlenecks have led to a surge in inflation and some of the fastest price gains for a broad range of goods and services in the last 40 years. In response, some financial experts expect central banks to raise rates multiple times this year and start selling off some of the hundreds of billions in bonds they purchased during the pandemic. The threat of entrenched inflation supposedly requires central banks to respond aggressively and raise interest rates repeatedly over the course of 2022 despite tightening financial conditions and seemingly slowing economic growth. Other economists disagree, insisting that central banks have responded appropriately by not taking drastic and unnecessary actions that could cause a recession. Long-term inflation pricing in the bond market suggests that the inflation threat is a short-term problem, and small rate increases now can more than offset the risk of runaway, long-term inflation. The bigger risk is an economic slowdown or outright recession brought on by central banks raising rates too fast while selling off hundreds of billions in bonds into a global debt market that will struggle to absorb record government deficits.
Arguing for the motion is Mohamed El-Erian, President of Queens' College at Cambridge University and Chief Economic Advisor to Allianz SE
Arguing against the motion is David Rosenberg, President and Chief Economist and Strategist of Rosenberg Research & Associates Inc.
QUOTES:
MOHAMED EL-ERIAN
“The Fed has to act and act boldly. Already it has lost some credibility, and if it delays more, it will lose even more credibility and have very few policy options that are attractive.”
DAVID ROSENBERG
“My view is that inflation is going to ultimately decline of its own accord and the historical record proves that.”
Sources:
CNN, CNBC, PBS, France24
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