A 'Very Modest' Taper Is Undeserving of a Tantrum

Rapid economic growth need not lead to significant increases in interest rates or meaningfully faster inflation. Muscular recoveries from last year's deep slump imply neither the imminent end of prolonged monetary easing nor any marked slowdown in the printing presses.

Some folks are clearly having trouble digesting this break with orthodoxy. U.S. Treasury Secretary Janet Yellen's relatively anodyne comment about the prospect of higher borrowing costs from a pre-recorded interview with the Atlantic rippled through financial markets Tuesday. Yellen later clarified that she wasn't predicting or recommending that the Federal Reserve pull any stimulus. I believe her: It's unlikely that someone so well versed in Washington’s ways would talk out of turn. Fed officials zealously guard their independence, as Yellen did when she was Fed chair from 2014 to 2018.

Investors zeroed in on Yellen’s line that rates may have to rise “somewhat” to ensure the economy doesn't overheat. More telling, however, was her statement that any increases could be “very modest.” Those words point to the extremely incremental nature of what might transpire in bond yields or the Fed's benchmark rate. If anything happens at all. Central banks in most countries have practically taken to hiring planes towing banners proclaiming that rate hikes aren’t worth fretting about.

Even if the International Monetary Fund projects the global economy will grow 6% this year, the most since at least 1980, inflation is a long way from being problematic. Policy makers worry much more about deep scars from last year's disaster. They are very keen to talk about jobs, jobs, jobs. Wage rises are good. There should be more of them. Inflation is quiescent.

At least two developments in Asia this week underscore the new paradigm. The Reserve Bank of Australia raised its growth outlook Tuesday and forecast a nice decline in unemployment. The policy implications? Far from signaling a peeling back of accommodation, the RBA intimated that quantitative easing is likely to be extended. Conditions warranting an increase in rates are unlikely until 2024 at the earliest. Inflation is nowhere near the bank's 2% to 3% target. “The board places a high priority on a return to full employment,” Governor Philip Lowe said in a statement.