Monetary policymakers should not raise interest rates higher

Global monetary policymakers need to reconsider raising interest rates, despite persistent inflation concerns fueled by the ongoing Iran conflict. Hiking rates excessively could harm the global economy and stock markets, rather than serving the intended purpose of controlling inflation. In September, the US Federal Reserve, the Reserve Bank of Australia, and the European Central Bank each increased policy interest rates, with more expected by the end of the year.

However, the real culprit behind 2022's rampant inflation was the massive expansion of money supply due to Covid-era measures, not high oil prices. High oil prices primarily drive substitution, dampening demand for luxury goods rather than causing true inflation. In the US, inflation cooled from 4.2% in May to 3.4% in July, despite oil prices falling to prewar levels by August.

Globally, oil prices initially rose above $120 but quickly dropped to around $100 in late September. Central banks should shift their focus inward, rather than on volatile commodity markets. The root cause of extreme inflation in 2022 was the excessive money creation by central banks, not just oil prices or Covid. US M4, a broad monetary measure, grew by 7.9% annually in July, though still slightly above the long-term average of 5.9%.

The eurozone's M3 growth was modest at 3.4%. Inflation is primarily caused by too much money chasing too few goods and services, as Nobel laureate Milton Friedman taught. While central banks have some room for adjustment, recent global debt concerns are likely to boost long-term rates temporarily. However, prudence is crucial to avoid flattening or inverting yield curves, which could choke lending, stall economies, and harm stocks.

There's no immediate need for further global tightening; patience is key, as positively structured yield curves are currently benefiting the economy.