US Fed’s errors ‘unforgivable’: Standard Life Investments
Latest News

US Fed’s errors ‘unforgivable’: Standard Life Investments

Central bankers have consistently overestimated underlying inflation since the GFC, which could mean low growth is locked in “for good”, says Standard Life Investments.


Yesterday, the US Federal Reserve (the Fed) raised the official interest rate by 25 basis points and announced it would begin reducing its US$4.5 trillion balance sheet.

In her statement accompanying the announcement, Fed chair Janet Yellen indicated the bank would ignore a dip in inflation data, labelling it as "noisy".

But for Standard Life Investments (SLI), the Fed's predictions about underlying inflation pressures have been poor ever since the GFC, and constitute an "own goal".

"The least forgivable of these [own goals] has arguably been the consistent tendency [of western central bankers] to overestimate the underlying inflation pressures in economies," said SLI in an economic note.

The Fed overestimated underlying inflation in the US economy in 2013, 2014 and 2016, said SLI.

"Only at the start of 2015 when the oil shock was at its peak and the dollar had appreciated close to 20 per cent over the previous two years, did officials gauge the inflation outlook correctly," said the note.

"The Fed has not been the only central bank to make these errors. The [Swedish] Riksbank, RBNZ, RBA, ECB and BoJ have also all had to downgrade overly ambitious inflation forecasts over recent years."

Because of central bankers' "misunderstanding of inflation", monetary policy has been too tight and real interest rates too high since the GFC, said SLI.

"It has also undermined private agents' faith in the ability and intent of central banks to meet their inflation objectives at all, with low inflation expectations becoming increasingly embedded in the pricing of government bonds and wage-setting decisions," SLI said.

"With the risks to most central banks' inflation forecasts still to the downside, they face important tests over the coming months; learn the lessons of the recent past and proceed even more slowly, or press on regardless and risk locking in low inflation for good."

Read more:

Fidante boutique appoints analyst

Macquarie closes direct robo-advice service

LIC growth ‘unsustainable’, says Zenith

ASIC industry funding model passes Senate

 

US Fed’s errors ‘unforgivable’: Standard Life Investments
investordaily image
ID logo
promoted stories

Appointments

Matt Spence

UniSuper recruits Merill Lynch analysts

Staff Reporter

Robert Brown

ACSA hires former director as CEO

Staff Reporter

Sudhanshu Garg

AMP Capital appoints director in Dubai

Staff Reporter

Analysis

investordaily image

Why MiFID II matters for Australia

Gary Stone

investordaily image

Five unconstrained fixed income ideas

Nick Gartside

investordaily image

Getting on board the ‘grey nomad’ caravan

Nick Griffin