Europe wagered that inflation will just kind of fade away once a few “structural...
here does the heavy lifting. If inflation rates and interest rates in the U.S. roughly matched those in the eurozone, we wouldn’t have seen much of a change in exchange rates.European inflation rates are now roughly the same as in the U.S. The June inflation rate for Europe of 8.6 percent wasn’t much better than our shamefully high rate of 9.1 percent.
However, despite similar inflation numbers, the Fed is raising rates much more aggressively than the ECB. Fed Chairman Jerome Powell and several other Fed Board members have pretty much promised that rates will go up by 0.75 percent in July, with other rate hikes soon to follow. The ECB, on the other hand, plans to raise rates bySo, what does this all mean? Well, here’s where you need to remember that they’re making these bets with other people’s money — your money.
A clear loss for the Fed would mean that the rate hikes do all the bad stuff and none of the good; inflation continues accompanied by a recession. This is the so-called “stagflation” scenario. A clear win for the Fed means that inflation quickly drops back to more normal levels of about 2 percent, employment stays high and growth begins to tick back up. The Fed’s bet could also end up as something closer to a draw, with the rate hikes taming inflation but at the same time triggering a recession.
How will all this shake out? I guess I have a bit more confidence in the Fed than the ECB but I’m really not all that sure. And the only advice I’d offer the bankers making those big bets on the path of inflation is this: if your casino has a lounge, you might want a cocktail. It’s going to be bumpy ride.
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