I am not advocating for the FED to do anything. I am pointing out that for inflation to be tamed, the FED must raise rates to inflation plus two percent
Disagree. Because it happened that way once doesn’t mean that’s the only path out. In fact, I’m calling an “almost top” to inflation now. There might be a bit of overhang, but I’m willing to bet the worst of the worst is behind us.
Why? Well, here is a list of things which have come down in price in the last 60 days: natural gas, lumber, cotton, corn, wheat, soybeans, copper, oil [gasoline, aviation fuel, diesel]. There are others, and decreases are sweeping through the commodity markets. There are a couple of reasons, the most salient of which is that traders who were bidding up futures have decided (or rather that the market has decided for them) that the future is not rising to the sky and they better get out while they can. That is putting a lot of downward pressure across all manner of commodity prices, as indicated in this WSJ piece:
Then there is the Fed, which has acted belatedly but sufficiently to tell people that it isdoing something, and I expect another message to be sent at the next meeting. That, frankly, will be sufficient, but I expect them to continue to wield the hammmer, probably in smaller doses, through the remainder of the year.
Those commodity price drops will take time to make it to consumer shelves. The price decrease in lumber, for instance, will take six months to a year to be reflected in home prices; and that said we are already seeing a (slight) slowdown of home transfers, price increases, and building starts. Oil prices are coming down, and even the (short term meaningless) announcement by the Saudi’s to increase production to 13m bbl will serve to keep the prices dropping. That redounds through everything, of course: manufacturing and transportation most obviously, but elsewhere too.
Now, does this mean I expect those inflation numbers to hop, skip, and jump back to 2%? Of course not. There’s a lot of overhang: increased rents coming on line, raises being demanded/offered to get employees back, and so on. But the structural inflation that existed in the 70’s (notably COLA union contracts and OPEC) are all but gone in significance, and those were a perpetual motion machine. Now it’s a gig economy and workers begging for raises or retail shops trying to figure out how not to give them and still have people up front. There’s a lot of mess in the economy, from freight containers in the wrong place to hospitals not having beds available because the rooms can’t be cleaned (not because there aren’t enough doctors.) That mess will take time to straighten out; in a few cases it will take the dreaded heavy hand of government, but this too shall pass.
To bring politics in through the side door, none of this will happen timely enough to provide relief by voting day (so bad news for the party in power), and I expect it to be a widely trumpeted issue, but watch the numbers, not the rhetoric. As these real-world decreases work their way through the snake inflation will moderate, helped by the Fed’s overdue actions. By this time next year the numbers will moderate, and your life will go on, albeit at a new, improved, higher base than before.
As usual, macroeconomic forecasts are subject to worldwide events in which case hide under your desk for a while. It’s what we told kids in the 50’s if a nuclear blast was coming, and it’s what we tell them today for active shooter emergencies, so it seems pretty timeless advice.