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Originally Posted by McLovin
Interesting.
But I don’t think #1 (“thus total CPI eases to around the Fed’s target”) is very likely by early 2023.
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I think that is vital to the rosy scenario.
The Fed’s top priorityl is to kill the inflation dragon. No Fed since the 1970s has let inflation get out of control, this Fed doesn’t want to go down in infamy. The FOMC governors would prefer not to drive the economy into recession, but recessions are normal and not the end of the world, so they absolutely will take a recession if that is the cost of avoiding a repeat decade of stagflation. Powell is a big fan of Vockler and has made it very clear that higher unemployment, falling housing prices, a bear market in stocks, are all things he is willing to cause, if he has to.
So if annualized monthly inflation is still well above their target (meaning, month over month trend above 0.3% or so (which annualizes to 4%) I believe the Fed will not let up on the rate hikes and other tightening.
Unless, of course, something big and very serious “breaks” in the US financial system, since financial system stability is an even higher priority than controlling inflation. But I think the Fed is pretty confident in its ability to fix breakages - in 2008 and 2020, it proved itself very capable at crisis response.