Markets are behaving dangerously but central banks have their heads in the sand

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At the US Federal Reserve Board’s Open Market Committee meeting this week the members will no doubt spend most of their time discussing the surge in economic activity and its longer term implications for inflation. Perhaps they should lift their gaze and look at some of the unusual developments in financial markets this year.

More than a decade of loose central bank monetary policies have been overlaid by just over a year of ultra-loose policy and fiscal responses to the pandemic that dwarf governments’ reactions to the 2008 financial crisis.

The combination of policies has had the desired effects. The US economy is roaring back, with first-quarter GDP expected to show at least 6.5 per cent growth and, with help from the base effects (the reference point is the economic nadir of the pandemic), second-quarter growth could reach double-digits.

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Unemployment is tumbling, retail sales are booming, manufacturing activity is surging and there’s been a significant uptick in inflation and in inflation expectations, which are at their highest levels in eight years.

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