Global Briefing: Marching Out of Step

The key issue in the global capital markets is the prospect of a synchronized growth cycle that will lead major industrialized countries to raise interest rates in the coming months. While the world economic outlook has improved in recent months, the recoveries in Europe and Japan appear too fragile at this juncture to tolerate a tightening of monetary conditions.

If there were a debate over the outlook for U.S. monetary policy, the stronger-than-expected July jobs data, released on Friday, resolved it. A tightening by the Federal Reserve at the Aug. 24 meeting is as close to a done deal as these things ever get. In addition, the risks have increased of another 25 basis-point hike at the Oct. 5 meeting.

Milton Friedman, the patron saint of monetarism, argued that inflation is once and always a monetary phenomenon. While it sounds nice, in reality inflation is just as much a psychological phenomenon. Fed tightening is meant not to combat current inflation, which according to most measures of general price levels like the GDP price deflator and personal consumption deflators is quite benign. The Fed, should it move, will be targeting investors' inflation expectations. ...