The WSJ explains why investors should fear a Fed that has become complacent about inflation. Mr. Powell and his mainstream economic allies assume they can always control inflation by hiking interest rates. That may be true, but it is a lot harder said than done and in almost every case when the Fed has raised rates to prevent inflation it has lead to recession.
It has taken four decades, but the Federal Reserve has finally shaken off its fear of inflation. The markets are only just waking up to the implications of the shift.
The outlines of the turnaround have been developing for a while as the Fed’s focus has moved from its inflation mandate to a constant emphasis on its goal of full employment. Meanwhile, its measure of rising prices has moved to an average target, allowing inflation to overshoot a 2% goal to make up for past misses.
Last week, Fed Chairman Jerome Powell underlined the final two steps: looking at where inflation actually is, rather than worrying about where it is forecast to be, and making clear that neither the current wild excess in the stock market nor the recent run-up in bond yields bothers him.
The shift should prompt a re-evaluation of the dominant market narrative. Up to now, the assumption has been that the Fed will tolerate some short-term inflation created by President Joe Biden’s $1.9 trillion stimulus, but that in the long run the Fed will reassert control or inflation will go away by itself.
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