The Economist Magazine 11th February 2022

Jerome powell, the chairman of the Federal Reserve, once compared setting interest rates to celestial navigation. Today, as inflation spikes, there is a growing sense that the Fed has lost its way. It looks as if it is about to make an abrupt change of course by tightening monetary policy hard and fast. That prospect has battered stock markets and led many firms and homeowners to wonder if the era of low rates might be over for good.

The reality is more complex. In the short term the F ed does indeed need to get a grip. But, as we explain (see Briefing), in the long run the world’s ageing population will keep a cap on interest rates. That points to an unpleasant financial squeeze, rather than a return to the 1970s.

Interest rate rises are daunting because much of the world has got used to an era of almost free money. No g7 central bank has set interest rates above 2.5% in over a decade. Back in 1990 all of them were above 5%. Cheap financing has come to seem like an indelible fe ature of rich economies . It has let governments run extraordinary deficits, propelled asset prices to astronomical highs and forced policymakers to reach for other tools, such as bond buying and stimulus cheques, to prop up the economy during slowdowns.

That is why surging prices over the past 18 months have been such a rude surprise to the Fed and other central banks. In America consumer price inflation has re ached 7% and, far from being transitory, is feeding through into wages as the idea that bills will go up is being bak ed into households’ and firms’ expectations. Private sector wages and salaries in America are up 5% in a ye ar (see Business section). In Dec ember the median American consumer expected prices to rise by 6% over 12 months. Man y of these trends are being felt around the world: global inflation has now reached 6%. The Economist Magazine 11th February 2022

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