October 14, 2024
Ken Rogoff, who is not only an economist and Harvard professor but also a chess grandmaster, thinks we’re going to see more inflation spikes. He also thinks we’re in for higher volatility, inflation, and interest rates, no matter what the Federal Reserve does.
Rogoff (rightly) said the low inflation and low interest rates of 2008-2022 were abnormal and won’t return. He thinks we’re right to expect an environment like the early 2000s because the inflation-adjusted 10-year Treasury yield averaged 0% from 2012-2021, and in effect was negative much of that time. Real rates at the long end of the curve are now returning to a more normal 2% or so level.
Thus, Rogoff is the pessimistic economist.
Contrary to popular belief, central banks don’t tightly control inflation. Their goal is to balance the risk of inflation, unemployment, and other things like government debt.
In my view, I think the Fed would like to see more situations where they take a bit of a chance on inflation. That’s probably why the September cut was 50 basis points. The Fed would rather inflation tick up than have high unemployment.
Also, don’t forget the Fed has room to cut the short-term rates, unlike in the 0% rate era. Still, Rogoff expects little change in long-term rates, at least for a while. So, homeowners looking for mortgage rates to plunge may have to wait longer.
Lastly, Rogoff thinks even if central banks managed to rein in inflation now, it’s probably bound to return sooner than what most forecasters think. In fact, he called for another 2022-like inflation surge in the next seven or eight years. By then we’ll see if he’s a pessimist or a realist.