4 ms·

The Fed is unlikely to intervene in the short term because they have acknowledged that undershooting their 2% average inflation target means they have to allow

by tcbawo 5y ago

The Fed is unlikely to intervene in the short term because they have acknowledged that undershooting their 2% average inflation target means they have to allow it to overshoot from time to time. We're still working out supply shortages and imbalances. But, I expect they're only going to start tightening once we've exceeded 3% or more on an annualized basis.

BozeWolf 5y ago
Maybe I do not understand you correctly, but the 4.2% is YoY.
- frankbreetz 5y ago
  They are considering this "Transitory" meaning they think it will drop with no changes to the Fed's behavior. Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation", or higher then normal inflation in order to catch up to normal after years of lower then normal inflation. Also, as another comment points out most of this increase comes from increases in used automobiles, gasoline, and airline fares. This can all be explained by supply issues and large drop in those item last year at this time. The Fed's behavior have minimal effects on that.
  - dragonwriter 5y ago
    > Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation" That’s not really an argument that it factually is transitory, and I don’t think there is any real good reason to think “catch-up” inflation is any better than the regular kind. (OTOH, the context of the COVID rebound is a strong reason to think it is likely transitory.)
- dragonwriter 5y ago
  Its YoY but its still viewed as transitory. Given that the period also saw the economic rebound from the COVID sharp drop, including the fastest quarter of economic growth ever recorded in the US, followed by two more unusually strong growth quarters, it’s not hard to see why. Unless that’s a sustained trajectory rather than just a rebound from one-time impairment, you wouldn’t expect strong demand-pull inflation to continue.
zozin 5y ago
Why would they intervene? Increased inflation was one of the reasons for passing so much stimulus. Several years of 3-5% inflation means the government's debt is 20-25% smaller relatively speaking. The Fed has been trying to get to 2% for nearly a decade and they're on the record saying that +2% inflation (read 3-5%) is okay by them for an extended period of time since that would make up for the lack of inflation during the 2010s.
- Jeema101 5y ago
  Because if banks have underwritten fixed-rate mortgages to people at 3% APR and inflation goes above 3%, then banks begin to lose money. Nobody wants banks to become insolvent.
- imtringued 5y ago
  The Fed's job is hitting 2% inflation because that is basically what a healthy economy needs over the long term. The Fed has no obligation to help the US government shrink its debts. Inflation is caused by demand exceeding supply. 2% inflation means demand is exceeding supply by exactly 2% and that is a good thing because it means there is wiggle room for people to find jobs, there is wiggle room to let the economy shift from one industry to another, it means there is demand for technology that increases productivity.

by tcbawo 5y ago

BozeWolf 5y ago

Maybe I do not understand you correctly, but the 4.2% is YoY.

frankbreetz 5y ago
They are considering this "Transitory" meaning they think it will drop with no changes to the Fed's behavior. Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation", or higher then normal inflation in order to catch up to normal after years of lower then normal inflation. Also, as another comment points out most of this increase comes from increases in used automobiles, gasoline, and airline fares. This can all be explained by supply issues and large drop in those item last year at this time. The Fed's behavior have minimal effects on that.
- dragonwriter 5y ago
  > Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation" That’s not really an argument that it factually is transitory, and I don’t think there is any real good reason to think “catch-up” inflation is any better than the regular kind. (OTOH, the context of the COVID rebound is a strong reason to think it is likely transitory.)
dragonwriter 5y ago
Its YoY but its still viewed as transitory. Given that the period also saw the economic rebound from the COVID sharp drop, including the fastest quarter of economic growth ever recorded in the US, followed by two more unusually strong growth quarters, it’s not hard to see why. Unless that’s a sustained trajectory rather than just a rebound from one-time impairment, you wouldn’t expect strong demand-pull inflation to continue.

zozin 5y ago

Why would they intervene? Increased inflation was one of the reasons for passing so much stimulus. Several years of 3-5% inflation means the government's debt is 20-25% smaller relatively speaking. The Fed has been trying to get to 2% for nearly a decade and they're on the record saying that +2% inflation (read 3-5%) is okay by them for an extended period of time since that would make up for the lack of inflation during the 2010s.

Jeema101 5y ago
Because if banks have underwritten fixed-rate mortgages to people at 3% APR and inflation goes above 3%, then banks begin to lose money. Nobody wants banks to become insolvent.
imtringued 5y ago
The Fed's job is hitting 2% inflation because that is basically what a healthy economy needs over the long term. The Fed has no obligation to help the US government shrink its debts. Inflation is caused by demand exceeding supply. 2% inflation means demand is exceeding supply by exactly 2% and that is a good thing because it means there is wiggle room for people to find jobs, there is wiggle room to let the economy shift from one industry to another, it means there is demand for technology that increases productivity.