Taps Coogan – December 11th, 2023

Whereas we strongly disagreed with Mohamed El-Erian’s argument from a few days ago that central banks should formally target 3% inflation, we do agree with Independent Strategy President, David Roche, that central banks are likely to tolerate above trend inflation for a considerable amount of time while trying to shift responsibility on to fiscal policy makers nonetheless:

David Roche:

“There has been a very strong creation of an alternative interpretation of inflation which comes from papers done by the IMF… which is that the inflation was essentially imported, a price shock, an exogenous shock to the economy, it actually is working itself out as a relative price adjustment, and that increasing rates further would simply depress the economy unnecessarily… so there is nothing further that needs to be done from a monetary point of view”

“Now, whether you agree or disagree with this newfound doctrine is another matter. It seems to me to exonerate central banks from the past for having printed too much money… but I would not underestimate the importance in central bankers minds of this new doctrine coming out of the IMF and being now propagated by practically every worthy institution around the world. I think it’s overly simplistic, but there it is.”

“I would stick to my 3% (forecast for inflation)… but if you say ‘this is an adjustment’ …and will eventually reach the policy levels, but it might be a long period in the future, but not really the responsibility of monetary policy to do anything about, that’s how the thing will be styled up… the embedded inflation rate will be higher than before. It will be 3% instead of 2%.”

There is more to the interview so enjoy it above.