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Fed’s Brainard: Even countries that hiked interest rates ahead of U.S. didn’t avoid high inflation

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The Federal Reserve has come under criticism for waiting until March 2022 to raise interest rates in response to the burst of inflation in the wake of the pandemic, but a top U.S. central banker noted Monday that even countries that hiked earlier did not avoid the global rise in prices.

“Even jurisdictions that began raising rates forcefully in 2021 have not stemmed the global inflationary tide,” said Fed Vice Chair Lael Brainard, in remarks released Monday.

The central banks of Brazil, Hungary, New Zealand, Norway, Peru, Poland and South Korea all began forceful rate hikes in 2021, and the cumulative hikes have taken policy rates in some of these countries above 10%, according to a footnote in her remarks, which summarize her comments on a panel discussion on inflation at the Bank of International Settlements in June.

Despite these moves, through September 2022, core inflation in these seven countries was 9.5% year-over-year, rising 3.5 percentage points since March.

In her assessment, a “protracted series of adverse supply shocks” associated with the pandemic and Russia’s war against Ukraine contributed to high inflation seen around the globe.

The fact that supply chains were so fragile “could herald a shift to an environment characterized by more volatile inflation compared with the preceding few decades,” Brainard said.

Until the pandemic, it had been standard practice for central banks to “look through” supply shocks. The general feeling was that it was not good policy to raise interest rates and slow the economy when the supply shock — such as a shift in oil prices — might not last.

The experience of the pandemic and the war suggests that monetary policy might have to tighten for risk-management reasons, Brainard said.

“More speculatively,” longer-term changes in supply from labor supply, deglobalization and climate change could continue to make supply chains more fragile and “increase inflation volatility into the future,” she added.

The yield on the 10-year Treasury note moved up to 3.7% Monday and stocks were down sharply.

St Louis Fed President James Bullard, in an interview with MarketWatch, said the Fed likely needed to keep rates above 5% into 2024 to tame inflation.


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