In recent weeks, bond yields plunged, and investors have grown euphoric that the Federal Reserve would slash interest rates next year.
But hold on, says Harvard economist Ken Rogoff, former chief economist at the International Monetary Fund (IMF).
“Even with the recent partial retreat in interest rates, they remain well above the ultra-low levels to which policymakers had grown accustomed, and they are likely to stay at such levels even as inflation retreats,” he wrote on Project Syndicate.
“It is now past time to revisit the widely prevailing free lunch view of government debt.”
Some experts posited that interest rates would be low forever, Rogoff said. “That seemed to support the view that any concern about debt was an endorsement of austerity.”
So “many came to believe that governments should run large deficits during recessions and only slightly smaller deficits in normal times,” he said. “No one seemed concerned with the possible risks, in particular to inflation and interest rates.”
