Staying ahead of inflation in 2024
When it comes to tracking U.S. inflation trends in 2024, Stanford economist John Taylor will be paying attention to policy not just domestically but internationally as well. There are many global aspects to the health of the economy, Taylor said in an interview with Stanford Report.
Here, Taylor, the Mary and Robert Raymond Professor of Economics in the School of Humanities and Sciences, talks about what lessons can be learned from the decisions the Federal Reserve Bank 鈥 or the 鈥淔ed鈥 鈥 made in 2023 to increase interest rates and the potential risks if it lowers them too soon in 2024.
Taylor is a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR) and the George P. Shultz Senior Fellow in Economics at the Hoover Institution.
In 1993, Taylor developed the influential 鈥Taylor rule,鈥 which determines how a central bank should set interest rates in response to the rate of inflation and economic growth.
Interview with John Taylor
This interview has been edited for length and clarity.
With inflation coming down, what are some important lessons to be learned?
The lesson is pretty clear: Now that the Fed has raised rates, inflation is starting to come down again. The main issue was the Fed fell behind the curve in 2021 and 2022. We don鈥檛 know exactly why; it could have been the financial crisis and the hit to the economy that distracted them. , and most likely inflation would have continued to rise if they had kept rates so low.
Another lesson is monetary policy operates globally. We鈥檝e seen some high inflation mistakes elsewhere, in Latin America and Europe, for example. What I hope is that the lesson here becomes a global lesson. We鈥檙e not out of the woods yet 鈥 that鈥檚 for sure. But I think that the Fed is a very important player in the monetary policy game. Other countries are looking to make sure that the Fed doesn鈥檛 make a mistake and let inflation rise.
The Fed has indicated that potentially three cuts could come this year. When will it be appropriate for them to be dialing it back? And what will Fed Chair Jerome Powell be looking for and making those decisions?
It鈥檚 a question that鈥檚 on a lot of people鈥檚 minds right now. I tend to think that the Fed should not go too fast. They should take it easy. They have these rules in place they publish, including the Taylor rule. They鈥檙e very close to bringing inflation down to 2 percent. Seeing more substantial movement of inflation would be the reason to lower rates. There鈥檚 enough already to move it a little bit, but I wouldn鈥檛 say it鈥檚 going to be 3 points 鈥 it depends on what happens to the inflation rate. And if the inflation rate comes down faster than people currently expect, if it鈥檚 2 percent, next quarter, then maybe that is enough to lower rates at an appropriate speed.
The risk is that it will not continue to go down and they will lower rates too fast. On the other hand, if they don鈥檛 do very much, you have a risk that we go back to where we were before. And I think that鈥檚 not what anybody wants.
Are there any other economic trends that you鈥檙e going to be paying attention to this year?
Regulatory and fiscal policy are very much part of the equation of what needs to be done. I think it鈥檚 key that the Fed encourages a more reasonable budget policy. With budget policy, you get into regulatory things. There鈥檚 so much dispute and disagreement about this. But if you look at the more successful periods in U.S. history and at other countries as well, having a little less regulation will be better.
The economic recovery we are seeing right now is being described as 鈥渁 soft landing.鈥 Is that a description or an assessment you would agree with?
鈥淪oft鈥 means we don鈥檛 have a recession but there is slower economic growth for a while. I don鈥檛 think we need to have either. I think we can move into relatively fast growth if the Fed and fiscal authorities go in the right direction. I hope we don鈥檛 have to have any landing at all. We had good growth in the last part of last year and we want that to continue.
A lot of people are hurting in this country and around the world, and the more we can do to stimulate growth and not have big recessions like we鈥檝e had in the past can help. I鈥檓 very much of the view that a steady monetary policy is part of the factors that must be taken into account.
This Q&A was on Feb. 14 by Stanford Report.