St. Louis Fed President James Bullard said in an essay written on Tuesday that lessons from 1974 and 1983, when the Federal Open Market Committee face similar inflation levels to today's, demand that policymakers get "ahead of inflation."
"In particular, the takeaway is that getting ahead of inflation will keep inflation low and stable and promote a strong economy," the central banker wrote.
"From early 1994 to early 1995, the FOMC raised the policy rate by 300 basis points (going from 3% to 6%) in an environment where inflation was generally moderate," Bullard said.
"Similar to the 1983 experience, the associated ex-post real interest rate at that time was high. Again, the result was not a recession but instead an expansion, which lasted until 2001."
"The FOMC kept the policy rate relatively high above the inflation rate, and therefore real interest rates were relatively high. The subsequent macroeconomic performance—with respect both to inflation and to output and labour markets—was very good, which shows the merits of staying ahead of inflation as opposed to falling behind."
DXY update
The dollar index (DXY), which measures the greenback against six counterparts, ticked up 0.51% to 105.08. The two-decade high of 105.79 was struck on June 15.
The greenback has edged higher on Wednesday as the euro gave back earlier gains despite European Central Bank President Christine Lagarde saying the era of ultra-low inflation that preceded the pandemic is unlikely to return.
The ECB is widely expected to raise interest rates in July for the first time in a decade, following its global peers, to try to cool accelerating inflation, though economists are divided on the magnitude of any hike.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.