Furthermore, this inflation would be pre-announced: no-one would have been tricked, and inflationary expectations would remain anchored to the inflationary target.
But actual inflationary expectations may not have declined as much as bond markets imply.
An overheated economy can only exacerbate an incipient deterioration in inflationary expectations.
Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates.
Tethering inflationary expectations is vital under this regime, which is why central-bank credibility now matters so much.
A good global indicator of inflationary expectations is the price of gold, which has just reached a 27-year high and where market sentiment remains bullish.
Tightening too soon risks pushing the economy again into recession. Waiting too long risks firing up hard-to-reverse inflationary expectations.
Markets generally believe that next year the Central Bank actions continue to be a 2-3 interest rates to curb inflationary expectations, influx of hot money next year will be more positive.
