A “middle road” monetary policy

Central banks (in the United States and Europe) are now faced with high inflation and the ever-increasing likelihood that it will become permanent. They can then choose between two extreme solutions: Not react in order to not spark a recession or force governments to conduct a more restrictive fiscal policy; React strongly to suppress the inflation, which would require very high interest rates and a break from previous monetary policy. They will probably choose a “middle road” solution: react to inflation, but not as much as would be needed to really combat it. This choice will lead to: Higher interest rates than currently expected; Inflation remaining above the central banks’ normal inflation target s .