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“There is no historical precedent for a painless return from moderate to low inflation … No team
of policymakers has ever executed an immaculate reduction of inflation from moderate to low
akin to what we have seen in the vanquishing of high inflations past. Ironically, the stock market,
which in the U.S. has been yearning for signs that interest rates will not remain higher for longer,
actually provides the strongest evidence that a quick return to the Fed’s target is highly unlikely.
Policymakers—and financial markets— ignore this lesson at their own peril.”5
“The Consumer Price Index increased 8.5 percent for the year ended March 2022, following a
rise of 7.9 percent from February 2021 to February 2022. The 8.5-percent increase in March was
the largest 12-month advance since December 1981. Consumer prices for food increased 8.8
percent in March 2022, the largest 12-month advance since May 1981. Within food, prices for
food at home rose 10.0 percent and prices for food away from home rose 6.9 percent.”2
Back in March of 2022, the U.S. Federal Reserve was confronted with some of the largest increases in
consumer prices in over forty years. According to the Bureau of Labor Statistics:
2 https://www.bls.gov/opub/ted/2022/consumer-prices-up-8-5-percent-for-year-ended-march-2022.htm
3 https://tradingeconomics.com/united-states/effective-federal-funds-rate
4 https://www.imf.org/en/Blogs/Articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers
5 https://www.nber.org/system/files/working_papers/w31129/w31129.pdf
Soaring consumer prices prompted
the Fed to embark upon the first, of
eleven interest rate hikes to drive
down consumer demand, cool the
economy, and quell highly persistant
inflation. The Fed’s recent tightening
cycle was the fastest pace in forty
years.3
There is a downside to rate hikes at
this speed and scale. According to the
International Monetary Fund, ‘higher
for longer’ rates squeeze borrowers,
create stress within the banking system, and make it difficult for individuals and corporations to service
their debt — increasing credit risk. “The risk … is that borrowers might already be in precarious positions
financially, and the higher interest rates could amplify these fragilities, leading to a surge of defaults.”4
According to a National Bureau of Economic Research paper titled, “Disinflation and the Stock
Market: Third World Lessons for First World Monetary Policy,”
II. The Fed’s Big Gamble
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