Quote:
Originally Posted by jyl
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.
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What I don’t get, and perhaps someone can explain it to me, is this:
1) How can the govt, over a couple of years, print and give away literally Trillions and Trillion of dollars, and expect that the previously existing dollars would retain their value? How can that not be viewed as hugely inflationary (or, said another way, devaluing of existing dollars?) Because in pretty much every discussion I read or hear, that is rarely mentioned. How can it be thought that raising interest rates a bit (from essentially zero) for a few months can so easily “erase” that Trillions of printing? (This is what made the Fed claim that inflation was “transitory” so mind boggling to me. Did they really believe that?)
2) 2008 was bad in many ways, but as far as contributing to inflation the govt response was a pittance. Wasn’t it less than $1 trillion, most of which was loans that were paid back?
3) I don’t view the Fed as capably handling 2020. What did they do that was so capable or smart? It seems like all they did was be a participant in an undisciplined free for all orgy of unnecessary and overdone printing and spending.
I’m mostly interested in understanding #1.