I disagree with this. Powell could blow up the entire economy in about 5 seconds if he wanted to by saying rates will be 4% in June and inflation would be done tomorrow. Housing would tank, the stock market would tank, unemployment would sky rocket, wage growth would immediately stop and probably revert a bit. Inflation could have some ups and downs from there but I don't think it would average above 2.
The problem is we can't raise rates without blowing up the economy, not that it wouldn't stop inflation. It doesn't matter how much money is in the system if you nuke velocity back to near zero.
I'm talking in the medium term here. Because the response to this is in my mind literally a 10-20 trillion dollar stimulus package. THEN we will see inflation.
We're assuming the lever of markedly higher interest rates over a long period of time, generates in this tremendously complex economic machine, the output of lower consumer inflation. I'm not sure we'll see that lever pulled anytime soon, and if we do, I'm not confident it will work precisely as you describe.
Asset price inflation will reverse. But that wasn't trickling back to consumer inflation anyway.
Think of it this way. If you had 10x your annual salary to store somewhere, and the values of traditional stores of wealth (e.g., stocks, bonds, and real estate) were seriously stuck in reverse for the foreseeable future, where would you stash your value? Sardines? Bottles of wine?
We forget how young modern finance is, basically since the 1970s. For the first 10 years of that era, both interest rates and consumer inflation increased in tandem. We've built a narrative around that correlation, but what if that narrative is incomplete?
The problem is we can't raise rates without blowing up the economy, not that it wouldn't stop inflation. It doesn't matter how much money is in the system if you nuke velocity back to near zero.
I'm talking in the medium term here. Because the response to this is in my mind literally a 10-20 trillion dollar stimulus package. THEN we will see inflation.