Stephen S. Roach
This week, PS talks with Stephen S. Roach, a faculty member at Yale University, a former chairman of Morgan Stanley Asia, and the author, most recently, of Accidental Conflict: America, China, and the Clash of False Narratives.
Project Syndicate: You have been strongly critical of the US Federal Reserve for its delayed response to US inflation, likening its inaction to your own experience at the 1970s-era Fed, working under then-Chair Arthur Burns. With inflation remaining stubbornly high and the Fed hiking rates by sizable increments, can the US avoid a repeat of the prolonged stagflation that marked that decade?
Stephen S. Roach: I view stagflation as a protracted period of high inflation, below-potential economic growth, and rising unemployment. In the stagflation of the late 1970s, the Fed was, indeed, a key actor. Convinced that idiosyncratic supply-side disruptions like energy and food shocks should not be addressed by monetary policy, Burns erred on the side of excessive accommodation, allowing the real federal funds rate to fall deeply into negative territory from late 1974 to early 1978, setting the stage for the Great Inflation that was to come.
The Fed’s current chair, Jerome Powell, seems determined to avoid that mistake. But in reacting to pandemic- and war-related shocks, the Powell Fed initially succumbed to the Burns-era mindset and viewed sharply higher inflation as transitory. In fact, from November 2019 through October 2022, the Fed has held the real federal funds rate at -3.7% – fully two percentage points below the Burns Fed’s average of -1.7% in 1974-78.
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