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Does keeping interest rates moderately high for a long period of time have the same impact on inflation as raising interest rates sharply for a short period of time?
The Federal Reserve's and the ECB's current strategy is to keep interest rates moderately high (given the level of inflation) for a long period of time, whereas in the past their strategy was to raise interest rates quite sharply and then lower them quite rapidly. Are these two strategies equivalent in terms of their impact on inflation? This is doubtful. While the strategy of raising interest rates modestly (relative to inflation) does not cause growth to fall well below potential growth, it is likely to have a limited impact on inflation, even if it is maintained over the long term. We still have our doubts about the ability to achieve a "soft landing", a disinflation that is quick enough and not too costly in terms of growth.
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Natixis
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