Does the Fed or Central Bank have an inflation game plan?
You might say it’s interest rates, but this is totally wrong. Every country in the world with high inflation has high interest rates and inflation stays high and interest stays high. It’s money supply. You can cut money supply with high interest rates, which is the old way of doing it, but you can raise interest rates independent of money supply and increase money supply independent of rates.
The answer might be this: In 2008, the then “unorthodox monetary policy”’ of quantitative easing , which is now the orthodoxy, was used to support economies going through a liquidity crisis. It didn’t create inflation when everyone expected it. Why? This increase of money supply did increase inflation but in financial assets, bonds, stocks and real estate.
So the way to drain money from the system is to let these assets take a haircut and with a little luck the bubble deflates rather than bursts. The current stock correction has already drained $8 trillion in U.S. wealth and a similar amount in the current bond-aggeddon I’m sure, though I haven’t calculated it. This will have a trickle down drag on inflation and leaves the central banks with a mechanism to drain the excess money supply from the system while preserving interest rates and, much more importantly, short-term liquidity operations available to stave off systemic damaging panics.
Liquidity sets asset prices which sets inflation trajectory. As that trajectory will be to hold inflation at these levels, the question is where on, say, the S&P 500 the liquidity is turned on and where it is turned off.You can think of it this way: how long will it take to get beyond the effects of the loss of wealth created by Covid? That’s how long we will have inflation and how long we will be in a volatile market moving to adjust.
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