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  • Writer's picturePete Jonson

Asset inflation and monetary policy

Annual meeting of central bankers at Jackson Hole included discussion of whether existing models of goods and services inflation are explained by conventional economic models.

The AFR’s Karen Maley adds: ‘But low [goods and services] inflation isn't the dilemma for Yellen and her fellow Fed policy-makers. They're also confronted with the risk that ultra-low interest rates, and extremely easy financial market conditions, are fuelling speculative asset-price bubbles – particularly in the US share market.

‘And the Fed's latest minutes suggest this is also a contentious subject for top Fed officials. One camp argued that easier financial market conditions had largely erased the impact of the Fed's two rate hikes this year, "and that a tighter monetary policy than otherwise was warranted".

‘But others argued that the rise in US share prices was justified by the fact that the neutral level for US interest rates had fallen, and because of the favourable economic environment.

‘Earlier this month, New York Fed chief William Dudley expressed concern that financial conditions are excessively easy and said he expected the US central bank would raise interest rates again this year if the US economy holds up. Although Dudley is a close ally of Yellen, it's far from clear that the Fed chief shares his anxiety about overly easy financial conditions, at a time of falling [goods and services] inflation, falling bond yields and narrowing credit spreads’.

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