Powell has admitted that inflation might last longer than anticipated or be higher than anticipated
He has said the Fed would use it's tools to fight inflation if needed
My question
1: What tools does the Fed have to fight inflation
{The Fed certainly does not have the power to reign in congressional spending]
2: What ever tools the Fed may choose to use, will their choice be effective.
3: What ever tools the Fed uses, what effect would this have on the economy
Now this is how I see it
The Fed can raise int rates of taper asset purchases
If he Fed raises int rates enough to tame inflation, how much is enough??? Everything is based on monthly payments. Houses would go down as would everything bought on credit or the market would seize up as the buyers could not afford maybe 10 % int . What happens to you and me if we want to buy some thing on credit, a house, car etc. I doubt the auto industry would lower prices enough for payments based on 10 % int. Do you think 10 % is too much to tame inflation. Does anybody remember Volker and consumer credit costing 22 %
Maybe the Fed decides to taper their 120 bln of asset purchases every month. Maybe they buy 60 bln a month. What do you think the re-action would be to a generation of traders who know nothing but the Fed put. Assets in general do not go down if you buy an asset with a Fed put
I believe tapering was tried some time ago and markets re-acted negatively so strongly that the Fed had to abandon tapering.
I have an idea the Fed may cause a disaster if they attempt to fight inflation
This is such uncharted territory with unusual factors that I don't think anybody can be certain of anything............except that energy prices are likely going higher because of them replacing cheap, reliable, very power dense and abundant fossil fuels.
Even that would change if the fake climate crisis were exposed(unlikely) or after they run into huge problems after imposing the new way of doing it.
Or if there was a global economic/financial collapse from the weak foundations giving way all at once or the bubbles bursting......it's more likely to NOT happen because as Joj has been saying, we've heard the scare mongers claim it was going to happen.........for decades and yet things just keep moving along relatively well. ......with bumps now and then.
When energy prices go up...........the cost of everything goes up. Just the transportation element is critically dependent on energy prices.
Always a good topic.
I think one difference this time is that the markets are ready and willing to see rates increased to fight inflation.
I don’t remember the time frame of the previous attempt at reducing the bond buying but if I remember correctly most folks didn’t think inflation was a concern.