ECB-Board Member Bini Smaghi was 4th board member since last week’s press conference to say that one 25bp hike was enough to return inflation back to the 2% target in 2yrs time (Trichet, Stark, Orphanides before him). Whether true or not, market reaction since last Thursday clearly in excess of that expected or desired. This French economist’s website probably works against him but you never know; www.stroptrichet.com
BOE-‘The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances.
Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”. The Committee believes that, if Bank Rate were set to bring inflation back to the target within the next 12 months, the result would be unnecessary volatility in output and employment.
ÃƒÆ’Ã‚Â Classic Philips curve trade-off being described here as well as amount of time given to bring inflation back to target
FRB-5 stories since Sunday trying to dampen rate hike expectations seems like a coordinated plant: Page 1 of WSJ today, FT article today citing ‘senior officials’, Market News piece from Beckner from yesterday, Washington Post article yesterday from Novak, and Blinder editorial in New York times on Sunday. Also Lacker was unusually tame yesterday in his remarks on inflation expectations.
In fact, it can be said that this entire cycle has witnessed subdued inflation responses from top CBs. There is probably no precedent for the Fed cutting aggressively into the food/fuel negative supply shocks.
‘SOME’ have suggested this is a baby boomer phenomena – short sighted aversion to ‘pain’ by a bunch of spoiled kids more than willing to eat their seed corn seems to crop up everywhere. Nothing gets addressed until it gets bad enough to be a major crisis. Energy, biofuels, environment, Iran, weak levies, etc. etc. and now inflation.
It does seem to explain a lot.