Central bankers are happily behind the curve

Those urging the Federal Reserve and other central banks to raise their cash rates in line with economic recovery have missed the point: these days the game is about warding off deflation, not inflation.

The chairman of the US Federal Reserve Board between 1951 and 1970, William McChesney Martin, famously described the job of central banking in a speech in 1955: “The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Paul Volcker, appointed in August 1979, confirmed that idea by immediately raising the Fed funds rate to 12 per cent and then to 20 per cent in 1981.

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