Doug Noland: The Road to Normalization

This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.
The past week provided important support for the ‘peak monetary stimulus’ thesis. There is mounting evidence that global central bankers are monitoring inflating asset prices with heightened concern. The intense focus on CPI is beginning to blur. They would prefer to be on a cautious path toward policy normalization.
June 25 – Financial Times (Claire Jones): ‘Global financial stability will be in jeopardy if low inflation lulls central banks into not raising interest rates when needed, the Bank for International Settlements has warned. The message about the dangers of sticking too closely to inflation targets comes as central banks in some of the world’s largest economies are considering how to end years of ultra-loose monetary policy after the global financial crisis… ‘Keeping interest rates too low for long could raise financial stability and macroeconomic risks further down the road, as debt continues to pile up and risk-taking in financial markets gathers steam,’ the bank said in its annual report. The BIS acknowledged that raising rates too quickly could cause a panic in markets that have grown used to cheap central bank cash. However, delaying action would mean rates would need to rise further and faster to prevent the next crisis. ‘The most fundamental question for central banks in the next few years is going to be what to do if the economy is chugging along well, but inflation is not going up,’ said Claudio Borio, the head of the BIS’s monetary and economics department… ‘Central banks may have to tolerate longer periods when inflation is below target, and tighten monetary policy if demand is strong – even if inflation is weak – so as not to fall behind the curve with respect to the financial cycle.’ … Mr Borio said many of the factors influencing wage growth were global and would be long-lasting. ‘If, as we think, the forces of globalisation and technology are relevant [in keeping wages low] and have not fully run their course, this will continue to put downward pressure on inflation,’ he said.’

This post was published at Wall Street Examiner by Doug Noland ‘ July 1, 2017.