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Are Inflation Fears Justified?

Summary:
In the near term, markets should not be too worried about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board. But longer-term inflation risks are skewed much more to the upside than many investors and policymakers seem to realize. CAMBRIDGE – Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the

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In the near term, markets should not be too worried about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board. But longer-term inflation risks are skewed much more to the upside than many investors and policymakers seem to realize.

CAMBRIDGE – Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the world. But while markets are probably overstating short-term inflation risks for 2021, they do not yet fully appreciate the longer-term dangers.

To be clear, huge macroeconomic support is unequivocally needed now and for the foreseeable future. The pandemic-induced recession is worse than the 2008 global financial crisis, and parts of the US economy are still in desperate straits. Moreover, despite promising vaccine-related developments in the fight against the coronavirus, things could get worse.

Against this backdrop,...

Kenneth Rogoff
Thomas D Cabot Professor of Public Policy, Harvard University, former chief economist IMF, International Grandmaster of Chess, Latest book: The Curse of Cash

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