A decade of 4%, 5% inflation is really not bad
I do think we raise to 5% -- and the pace of it ultimately is irrelevant. But then rates do not drop after mid-23 like the futures market has it, because inflation doesn’t really drop. And the reason inflation doesn’t drop is because by then inflation will be mostly about wages, and wages, I would expect, will be around 4%, 5% by then.
By May, we’ll get to maybe 4%, 5% inflation. We’ll have a 4% or 5% fed funds rate. So, Powell’s raised the fed funds rate above the rate of inflation -- “mission accomplished.”
And then we should never talk again about what happened in 2020 or in 2021 when the Fed was buying $35 billion of mortgage-backed securities when we had the massive housing bubble.
Q: So they’ll get rid of that 2% target for now?
A: Yes. And that wouldn’t be the worst thing in the world.
A lot of the great moderation of the past 30 years was with the product of free forces -- on the labor side, you had about 12 million Mexicans that crossed the border between basically the end of the Tequila crisis in 1994 and 2007 -- and this flow was stopped and even reversed since Covid. So we no longer have cheap labor.
Bloomberg 3 December 2022
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