The chart below shows the periods inflation ran above or below the average inflation rate from 1982. Such is why, over the past decade, the Fed flooded the economy with liquidity and zero interest rates to boost economic activity. Deflation is a far more insidious problem than inflation longer term. If the Fed did nothing, “high prices will cure high prices.” The real risk remains a “deflationary” spiral that depresses economic activity and prosperity. The reality is that inflation is not the problem. Today, Powell says the Fed’s concern is entrenched inflation which causes pain to the economy. Deflation is a far different story, as it becomes an entrenched psychological impact that becomes difficult to dislodge. Such makes sense as inflation is easy to deal with by hiking rates and slowing the economy. “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”īefore the pandemic, the Fed’s storyline was to let inflation run hot rather than allow inflation to stay too low for too long. Powell made that point very clear following the latest FOMC announcement. However, those hopes got dashed each time as Jerome Powell clarified that the “inflation fight” remained the primary focus. Since June, the market rallied on hopes of a “policy pivot” by the Federal Reserve.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |