Blackrock is out with a great note today (read it here) that talks about the tradeoff between growth and inflation. They estimate it would take a deep recession in the US and 3 million job losses to bring inflation back to 2% quickly and it would be even worse in Europe.
They say that it's high time central bankers were upfront about it and debate the tradeoffs openly, write Jean Boivin and Alex Brazier.
By focusing solely on the theoretical de-anchoring of inflation expectations and ignoring the very real growth costs, both the Fed and the ECB are swerving a crucial debate that needs to be had: where should policymakers land on the inflation/growth trade-off and what is the appropriate speed at which inflation should come back down to the 2% target?
Instead, central bankers are increasingly relying on stringent, inflexible language in an effort (I think) to bluff on credibility while insisting there won't be a hard landing.
They argue that the right path for central banks is to reduce the hit to growth by taking longer to bring inflation back to target. That would allow production capacity to normalize without a hard hit to growth.
The problem is that central banks are married to the idea that their words steer inflation expecations. So instead of having an open debate and living up to their promises of transparency, they'll play a game of hidden messages and have covert debates.
Blackrock also highlights that the myth of Vocker and weighs heavily on global central bankers, who are often more concerned with their personal legacies than what's best for society.
"From the personal perspective of central bankers, the worst possible outcome is to be the next Arthur Burns. He went down in history as the man who allowed U.S. inflation to reach nearly 15% and inflation expectations to surge. From that perspective, causing a recession is not as bad an outcome, particularly if there is a chance to blame it on something else or spin it as a 'Volcker moment'"
That's a particularly damning comment because was written by a central bank insider -- Jean Boivin was the deputy governor of the Bank of Canada.