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The report by Deutsche Bank has criticized the Fed’s policy of not raising interest rates until significant inflation kick’s in. It notes that there’s a tickling inflationary time bomb waiting to explode which could possibly have a devastating effect on the global economy.
On Monday, June 7, Germany’s largest lender Deutsche Bank released its reports warning that a potential inflation bomb is tickling around. The banking giant says that the American government’s elevated spending and loose monetary policies can lead to a potential economic crisis going ahead.
Basically, the analysis questions the Federal Reserve’s framework of tolerating high inflation against full and inclusive recovery. Besides, Deutsche Bank says that Fed should not wait to tighten its monetary policy until inflation appears. It adds that there are some $2 trillion in excess savings that the consumers have amassed over the past year. Deutsche Bank’s chief economists behind the report state:
“Consumers will surely spend at least some of their savings as economies reopen. This raises the very real specter of consumer-driven inflation. The consequence of delay will be greater disruption of economic and financial activity than would be otherwise be the case when the Fed does finally act. In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”
Deutsche Bank about Inflation
To Deutsche Bank, Fed’s current approach with inflation looks improper. The Fed is not willing to raise interest rates and curtail asset purchases until it sees “substantial further progress” towards its inclusive close. Global central banks note that the Fed is nowhere close to attaining them.
Also, the consumer price index and personal consumption expenditures have surged well above Fed’s 2% inflation goals. But the Fed says that this surge in inflation is temporary. The Fed says it will abate once supply disruptions and base effects from the pandemic wear off.
The Surge in the US Federal Deficit
So far, the legislated stimulus packages from the U.S. government have been over $5 trillion. This is nearly 25 of the US GDP. For the year 2020 and 2021, the US federal deficit is likely to be anywhere between 14-15% of the GDP. For comparison, the U.S. federal deficit was just 9% of the GDP back in 2009.
The Deutsche Bank economists note that the US federal deficit has reached levels close to World War II. At that time, the deficits remained between 15% to 30% for four long years. The report further adds:
“While there are many significant differences between the pandemic and WWII we would note that annual inflation was 8.4% in 1946, 14.6% in 1947 and 7.7% in 1948 after the economy normalized and pent-up demand was released”.
However, some of the big Wall Street players agree with Fed’s view that the inflationary pressure is transitionary. Jan Hatzius, chief economist at Goldman Sachs presents some “strong reasons’ to support the Fed. Hatzius notes that “the unprecedented role of outliers” has led to recent inflationary spikes which will come back to normal soon.
Also, he points out the expiration of enhanced unemployment benefits. This will send workers back to their jobs in the coming months while easing wage pressure. “All this suggests that Fed officials can stick with their plan to exit only very gradually from the easy current policy stance,” Hatzius wrote.
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