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Is there any sign that the three big central banks—the Fed, the ECB, and the Bank of England—will change their loose monetary policy?
I don’t think so. The ECB is flooding the markets with money, which has taken away the possibility of a really disorderly default in Greece. What we have seen at the Bank of England is quantitative easing. Later this year there’ll be more bad news from the euro area, and the Fed will react with looser policy. This is really the year of the central bank.
When the central banks flood their economies with money, conservatives worry that we will get inflation.
The whole idea right now, that actually there is a potential for inflation, is from gaga-land. By the end of the year, in 2012, we are going to see inflation approaching 1 percent in the U.K., and falling further. So it’s not inflation that we will have to deal with down the road. There is still this problem of deflation. Inflation is not the name of the game right now.
Even though the Fed said it would keep rates low through 2014, they can change their mind if inflation proves to be a problem.
They can always change their mind. My suspicion is that we are going to see low rates for a very long time. There is no evidence anywhere of a wage-price spiral coming. There are no big wage demands in the U.S., in the U.K., or in Europe.