[Founding Interview] 'Bernanke Research Colleague' Gertler "US Must Raise Interest Rates at Least Twice More This Year"

Asia Economy 35th Anniversary Interview
Monetary Policy Expert Mark Gertler, NYU Professor
Names 'Inflation' as the Biggest Global Economic Risk
"Fed Nearly 6 Months Late on Interest Rate Hikes"

"I believe the benchmark interest rate needs to be raised at least two more times this year. Inflation will be an obstacle to economic growth not only next year but also beyond 2025."

Mark Gertler, a global monetary policy expert and professor of economics at New York University (NYU), stated this in an interview with Asia Economy earlier this month ahead of the U.S. Federal Reserve's (Fed) June Federal Open Market Committee (FOMC) meeting. He emphasized that "the biggest risk to the global economy currently is inflation," suggesting that the upper bound of U.S. interest rates could rise to 5.75% through two additional hikes within the year.

This diagnosis aligns precisely with the Fed's decision on the 14th (local time) to keep the current rate at 5.0?5.25% during the FOMC meeting, while raising the year-end forecast to 5.6% (median) through the dot plot. Professor Gertler pointed out, "The economy was quite strong in the first quarter of this year. Inflation remains sticky," adding, "Without clear evidence of economic slowdown and a decline in inflation, we will not see a halt in tightening."

Throughout the interview, he expressed concerns about core inflation not falling as expected and the uncertainties surrounding monetary tightening policies. The U.S. Consumer Price Index (CPI) released the day before showed a 4.0% increase year-on-year, marking the lowest rise in two years and two months, but still far exceeding the Fed's price stability target of 2%. Particularly, contrary to the headline figure that met expectations, Gertler's concerns were confirmed again with the 'sticky' housing costs and service prices.

Warning about the uncertainty of inflation, Professor Gertler said, "The Fed was nearly six months late in raising rates," and added, "Except for Harvard's Larry Summers, who pointed out that the inflation problem was not temporary, no one properly understood the situation at the time."

Professor Gertler, who has published numerous papers in macroeconomics and monetary economics, is a close research colleague of former Fed Chair Ben Bernanke and one of the 30 most cited economists worldwide. In 2021, he received the prestigious BBVA Frontier of Knowledge Award, recognizing major contributions in his research field, alongside former Chair Bernanke, Princeton's Nobuhiro Kiyotaki, and John Moore of the University of Edinburgh and London School of Economics.

Below is a Q&A with Professor Gertler.

-What is currently the biggest risk to the global economy?

▲Inflation. And how central banks handle it is crucial. Inflation requires sustained, high-intensity monetary tightening policies. There is also significant uncertainty about how much inflation will fall going forward. Particularly, wages, services, and housing costs may remain sticky.

-Is a soft landing possible as the Fed suggests?

▲Definitely, there will be an economic slowdown. To be honest, there is uncertainty whether it will be a soft landing or a recession. We need to watch how inflation and the Fed's tightening proceed.

For now, we don't know how oil prices, which affect inflation, will behave. How much the economy slows depends entirely on monetary tightening policies.

-Your concerns about inflation sound hawkish (favoring monetary tightening). Is that correct?

▲Certainly, I believe there will be additional hikes within the year. However, the Fed's decisions depend on data. Decisions at the FOMC will vary based on incoming data. (Professor Gertler avoided directly answering the Fed's decision at this month's FOMC.)

-What do you personally think the terminal rate level will be?

▲I don't know (laughs). It depends on the data. Asking me about future rates is like asking what will happen to inflation. Currently, the real interest rate is close to zero. To lower inflation in the short term, it will have to be higher.

-Based on data so far, how much more should rates be raised this year?

▲I think at least two more increases are necessary. Inflation remains sticky.

-Wall Street still expects rate cuts within the year. What specific conditions do you see for the Fed to cut rates?

▲For the Fed to cut rates, inflation must slow down and unemployment must rise simultaneously. This is a balancing act. Again, rate decisions depend on incoming data. Core inflation has not fallen as much as the headline figure. The economy was quite strong in the first quarter. Without clear evidence of economic slowdown and a decline in inflation, we will not see a halt in tightening.

-Do you think inflation will remain an obstacle to economic growth next year and beyond 2025?

▲I do. I hope the situation improves, but it will not happen soon. If the Fed returns to its price stability target two years from now, they will be very pleased (meaning it will be difficult to achieve even in two years).

-Has the Fed's approach to the war on inflation been appropriate so far?

▲From a retrospective viewpoint, the Fed was nearly six months late in tightening. We were in a new world. Except for Harvard's Larry Summers, I think no one properly understood the situation at the time. We were caught off guard by the persistent rise in inflation and unforeseen events like the Ukraine war. The Fed should have raised rates earlier, but given the circumstances, we can understand why they made those decisions.

-You mentioned a balancing act. What should the Fed consider most going forward?

▲The balance between inflation and unemployment, and also the balance with financial stability. Personally, I think more consideration should be given to the balance between inflation and unemployment. Financial stability should be handled by other policymakers, not the Fed.

-What do you think about the impact of the Silicon Valley Bank (SVB) collapse?

▲Currently, mid-sized and small banks are under pressure. This will lead to economic slowdown. Strangely, it helps the Fed's work. (Regarding the possibility of further bank failures) there are potential crisis points, but it is not yet a crisis stage. Commercial real estate is a sector that could be hit. These factors will slow the economy.

-U.S. tightening has direct effects on Korea as well. What advice do you have for Korea?

▲Since Korea is tied to the dollar, U.S. tightening will pressure Korea. But I don't have a magical solution. Like the recent cases of troubled banks, I would say Korea should ensure it is hedging against the risks of U.S. monetary policy through risk diversification.

This content was produced with the assistance of AI translation services.