How The U.S. Tries To Control Inflation

Personally, I think we are in perhaps the biggest bubble of my life. Race once the Federal Reserve came in. People now expect the Federal Reserve to come back in. The big challenge is to raise interest rates enough without pushing the economy into a recession. People's expectations, their opinions about future

inflation

, actually result in higher

inflation

. That's the problem. When you have a Federal Reserve that, cycle after cycle, every time it suffers a crisis,

tries

to solve the problem of debt overhang by putting more debt into the economy. If you look at the explosion of central bank balance sheets right now, you say there is going to be inflation.

Stock market watchers are sounding the alarm. Personally, I think we are in what is perhaps the biggest bubble of my career. Investors have loaded up on risky assets like housing, tech stocks and even cryptocurrencies. Asset valuations are somewhat high. Cryptocurrencies that are really speculative assets, I think, are risky. They are not backed by anything. Many believe that the market problems began at the main American bank, the Federal Reserve, the Federal Reserve

control

s all money in circulation. That includes all the money in your wallet and the banks' coffers. They can print more during financial emergencies. Once the Federal Reserve came in.

People now expect the Federal Reserve to come back in. For the past two decades, the US Central Bank has kept lending interest rates as low as possible. They also bought bonds, flooding the market with emergency cash. The Federal Reserve's bond portfolio balance has reached an all-time high of nearly $9 trillion. What has happened is that the balance sheet has become more of a policy tool. The Federal Reserve is using its balance sheet to generate better results. The Federal Reserve's actions drove the market to all-time highs, but some within the central bank believe this bond-buying program must end.

The sooner the better. Analysts predict a reduction of between $2 and $3 trillion in the Federal Reserve's bond portfolio in the coming years. Doing so would stabilize the markets. But there is a risk that if the Federal Reserve withdraws its emergency stimulus too quickly, it could trigger a recession. The big challenge is to raise interest rates enough and tighten policies enough to

control

inflation without pushing the economy into a recession. Easier said than done. History is not necessarily on their side. So how did the Fed acquire nearly $9 trillion worth of assets and can sell them without bankrupting the economy?

The US government depends on its central bank, the Federal Reserve, to manage the economy. The Federal Reserve itself was created after a major crisis. There was a financial crisis in 1907. We didn't have a central bank and a big study was done that concluded that part of what we needed to avoid these future crises was a central bank that was able to create more currency at that time. of stress. The Federal Reserve has repeatedly demonstrated over time that it is well positioned to be the first to respond to any type of shock. The Federal Reserve's most important tool is the federal funds rate.

The federal funds rate right now is between zero and a quarter percent. That's the lowest they can go. It is very unusual to have interest rates close to zero. Basically, what the Federal Reserve does is set the rate at which banks borrow money from each other overnight. Now, from that short-term rate comes all the other rates that people pay in terms of mortgage rates or home equity line of credit rates or auto loan rates. But ultimately all rates are set by banks and the market based on the short-term overnight rate set by the Federal Reserve. He says central banks around the world have kept interest rates low to stimulate higher growth in the face of unusual financial conditions.

In the United States, bankers have resisted using negative interest rates. Instead, they have provided economic stimulus with tools like the bond portfolio. They track spending with a balance sheet. All banks have a balance sheet, they have assets and liabilities. The liability is the currency in circulation. The Federal Reserve notes that it is a major liability on the assets side of the balance sheet. The Federal Reserve then bought a number of things, including government securities and some mortgages. It's all because it is necessary to add back those liabilities, that currency in circulation with the assets. The Federal Reserve has the power to create more money when the financial system begins to crumble.

For this reason, experts call it the lender of last resort. The lender of last resort was in many ways the original function of the Federal Reserve. At first we didn't want to have a central bank because we were worried that there would be so much power added that way. But we needed this feature and that's why we could implement it in a. A way that allows supervision and accountability. For much of its centenary of existence. The Federal Reserve did not make much use of the balance. Sheet on 911. It was a balance sheet of about $750 $800 billion, and it was the largest it had ever been at that time.

Dr. Ferguson left the central bank shortly before the housing crisis hit in 2008. In that episode, nervous investors watching the housing sector began to withdraw from the entire market to avoid a large-scale collapse of the financial system. Federal Reserve Chairman Ben Bernanke authorized large-scale bond purchases, quickly pushing up the balance sheet. The experts called. It's quantitative easing. Quantitative easing, quantitative easing. Quantitative easing. Quantitative easing was this mechanism to try to stimulate greater credit creation. And the central idea here was that by buying safe instruments, Treasuries and agency mortgage-backed securities, they could stimulate even more accommodative credit conditions and try to generate more economic activity.

Investors buy bonds to generate a modest but guaranteed return. US Treasury bonds are perhaps the safest assets there are. They are known as a risk-free asset. And most of the mortgages that the Fed is purchasing are what are called conforming mortgages. Very, very deep and liquid market. Many traditional investors recommend using a portfolio that balances these bonds with stocks. But when the Federal Reserve enters the market, it takes these safe bonds and causes the profits on them to fall for everyone. That will make it more likely, from investors' perspectives, that they will ideally invest their capital in ways that support private innovation.

Having such a large balance sheet, almost $9 trillion, has contributed to this environment where a lot of money is flowing into risky assets and you're starting to see some crazy things. Companies that don't really have much business were able to go the IPO route in 2020 and especially 2021 and raise a lot of money. Those businesses eventually fail. There will be many investors who will hold the bag. Markets have come to rely on the Federal Reserve's buying patterns. But by making the Fed so central to efforts to get money into businesses in the spring and summer of 2020, we created an overall environment in which we did a lot more to support some really fragile financial intermediaries.

So if you were a large company, regardless of whether you were a highly solvent company or a not so solvent company, your ability to raise money by issuing new debt over the last few years has been amazing. The central bank took on non-traditional assets such as securitized mortgage loans. For some, this has been controversial. How many of you want to pay the mortgage for your neighbor who has an extra bathroom and can't pay his bills, raise your hand? How about we ask President Obama if he's listening to us? The Federal Reserve warned markets that the time had come to close the balance sheet which caused day traders to panic.

In the next year or sooner. Let's end quantitative easing. We are going to end the bond buying, we are going to end the injection of new reserves that creates a necessary money supply that is not bullish for gold. I'm sorry. The idea that one of the largest buyers and holders of government debt in particular, and mortgage-backed debt, would suddenly stop being a buyer and potentially start being a seller. That scared investors. And they quickly backed away. And that didn't even happen. Several years later, they began letting maturing bonds slowly come off the balance sheet. Over time, emotions calmed down and the balance stagnated.

Ben Bernanke's plan had been successful and stock valuations were at record levels. The central bank began slowly unwinding the balance sheet before warning signs appeared again in 2019. Towards the end of the 20s, strong market conditions gave the Fed enough confidence to start letting its bonds mature. They didn't get very far when economic growth slowed sharply and they once again began cutting interest rates. And that was in mid-2019, when unemployment was at its lowest level in 50 years and no one had heard of it. The pandemic sparked another major round of bond buying. The Federal Reserve once again removed safe Treasury mortgage-backed securities from the market.

They also established lending mechanisms to purchase bonds from municipalities and corporations. This was something new that the Federal Reserve did this time. The 2020 bond buying program brought investors back into the stock market after a sudden crash. Having such a large balance sheet, almost $9 trillion, has contributed to these infighting. Where a lot of money flows into risky assets. And you started seeing some crazy things, like cryptocurrencies or even nfts. I think a lot of the fervor for these has been driven by this ultra-low interest rate environment, where the pursuit of yield meant investing in risky assets. Large cash injections boosted large corporations at the expense of smaller companies.

The Federal Reserve simply didn't have the right tools to really help small businesses. And as we saw with the Main Street lending facility, which was supposed to help mid-sized businesses, the Fed didn't really have the right tools to support them either. In contrast, our country's largest companies are much more capable of raising funds through mechanisms such as issuing debt in the public markets. And this has been bought like crazy by these open-ended and bond funds and bond-backed ETFs. And what we do not want is for the complex set of machines, that is, the financial systems, to stop due to lack of liquidity.

There is no desire to force a recession as a result of a collapse of the financial system. Some members of the Federal Reserve argue that these emergency asset purchases are necessary. They believe that debts will be paid as they do. Mature after almost every crisis. There is often a survey, often a commission or hearing, etc., and then Congress decides how to adjust authorities to focus on these crises. The resulting end to our pandemic asset purchases will eliminate another source of unnecessary economic stimulus to the economy. I hope that these measures will help alleviate inflationary pressures in the coming months.

Certainly some of these people on the committee are eager to start reducing this balance. The Federal Reserve plans to unwind its asset portfolio at a more aggressive pace than it attempted after the housing crisis. We may all find that the price of money, the cost of borrowing, and the interest rate begin to gradually rise from historically very low levels. I've already seen some of that. Mortgage rates are a little higher now than in the past. And also the interest rates on loans for companies are somewhat higher. The Federal Reserve will reduce its bond portfolio by $2 trillion to $3 trillion in this round.

Market turbulence could follow the Federal Reserve's tightening of the economy, causing a recession. Are we going to get back to the Federal Reserve having a balance sheet the size it had in 2006 and early 2007? They are much more skeptical. The role of reserves on bank balance sheets has changed greatly. It's not fair to say that balance is not supposed to be used the way it is. It's a new tool. The new thing you have is one. It's being used pretty consistently. Second, it is being used on a scale never before imagined. But it's very public. But as with many things with the naked eye, you don't necessarily notice it.

Prices of almost everything are increasing rapidly. In October 2021, inflation peakedjump in more than 30 years. It is affecting specific sectors of the economy more strongly. Drivers face a 59% increase at the pump compared to a year ago. The average used vehicle sells for 26% more than a year ago. Vacation homes are also rented at a high price. Nobody likes inflation. In reality, no one wants to pay higher prices for anything. Maintaining stable prices is one of the Federal Reserve's primary responsibilities. In recent decades, the economy has been below the central bank's target rate. Now after the pandemic. The Fed may want inflation, at least for a while, to be above 2%, and it will get exactly what it wants simply because of accelerating rent growth.

Critics say there are signs of turmoil in the economy that the Federal Reserve is not listening to. I think it's pretty clear that the Fed cannot control inflation either up or down. Given current experience. The central bank has its defenders. The weight of the evidence is finally in my friend's favor. The Transitional team is going to win. There are many reasons to think that inflation is temporary. It doesn't mean it's going to be two months. It might be one year, but it won't be four or five percent annually for the next five years. In context, governments are spending a lot to keep society afloat.

The US Treasury debt is managed by the Federal Reserve. The bank's assets increased as it printed trillions of dollars to support the country. Which leads to the question: can the Federal Reserve control inflation? And if so, what could you do to control the cost of living in the United States? The people who manage the American economy prefer to keep inflation around 2%. This is because a low and constant rate produces a healthy business environment. These rates are tracked in categories such as food, energy and housing. These components are then compared to each other to establish their importance.

The final scores that are produced are recorded over time. The main one you hear about in the news is called the Consumer Price Index. Tracks all spending for 93% of the US population. Then there is trimmed average inflation, which discards outliers and focuses on underlying prices. Movements in the trimmed mean signal a more powerful inflationary trend. Then there is him. Pce. The Fed actually prefers to look at the PCE. That is, personal consumption expenses. Price index. The Fed's preferred measure of inflation is broader than the trimmed mean, but it discards some data from the energy and food sectors.

This is because prices experience greater swings in these indus

tries

more frequently. What is included and excluded from each inflation index affects its reliability. Some, like Danielle DiMartino Booth, a former Dallas Fed employee, believe the PCE is flawed. My biggest problem with PCE is that, on average, an American household spends 40-50% of its income on housing. If you look at it through such a simple prism and understand that the input of parts for the home is only about 22%, then you will see that you are underestimating the largest household expense by a wide margin. In the fall of 2021, PCE numbers reached generational highs.

When events like that happen, public officials turn to the Federal Reserve for answers. The Federal Reserve was originally created to create a stable American banking system. Its role has expanded throughout its centenary of existence. In 1977, Congress gave him a double term. Part of that mandate is to maximize employment. The other part of that mandate is to stabilize prices or basically keep inflation under control. Wilson says the Fed's ability to manage inflation depends on the extent to which inflation is driven by the labor market. We are currently seeing inflationary pressures largely because people have shifted their consumption from purchasing services to purchasing goods.

That has caused the demand for goods to exceed the supply of goods in a period of time in which suppliers did not have adequate time to really respond to that increase in demand. In 2021, a shaky global supply chain and clogged ports are causing delays. Many people, including Federal Reserve leaders, don't believe the economy has settled down. Chairman Powell previously said that this episode of inflation is temporary, but he is now moving away from using that language. We often use it to mean that it won't leave a permanent mark in the form of higher inflation. I think it's probably a good time to retire that word and try to explain more clearly what we mean.

The central bank believes that current conditions do not change the long-term outlook. This is because in recent years inflation has actually been lower than the Federal Reserve wanted. Before the pandemic, inflation was mild. The Federal Reserve had a 2% inflation target. It was below 2% now after the pandemic. The Fed has been saying they changed their thinking here. They want inflation, at least for a while, to be above 2%, and they will get exactly what they want simply from accelerating rent growth. In 2019, newly elected Chairman Powell argued that long-term inflation expectations were low. Experts watching the labor market reported that the takeoff in interest rates that began in 2019 disrupted the recovery.

Then an unexpected event. The pandemic pushed the central bank to create. Accommodative financial. Conditions. That means lowering interest rates, which in theory will make prices rise more quickly. Nobody likes inflation. In reality, no one wants to pay higher prices for anything. Economists believe that expectations are the main driver of inflation. Even though people think inflation is going to be high for a long time, they're going to say, "Hey, employer, you've got to pay me more, you've got to give me a bigger pay raise because inflation is going to go up." be tall And the businessman says that if he or she believes that inflation is going to be high, let's say that's fine, no problem.

I'll give them a bigger wage increase, but then I'll pass the higher price increase on to consumers. And then, lo and behold, people's expectations, their views on future inflation, actually result in higher inflation. That's the problem. A wage increase means a corresponding increase in prices unless productivity increases proportionately. What do you want? A boy with. Forearms. But even people inside the Federal Reserve think these models don't work. In September 2021, a senior economist at the Board of Governors published an article. It was titled Why Do We Think Inflation Expectations Matter for Inflation? This is definitely an opinion without consensus.

The article argues that the field of mainstream economics provides cover for a, quote, criminally oppressive, unsustainable and unjust social order. The document reflects the views of a broader movement of people who think the Federal Reserve needs reform. There was an internal debate within the Federal Reserve in 2008, 2009 and 2010. Why did we miss the financial crisis? Because? We missed the subprime mortgage crisis. And it was determined at that time that the Fed's inflation model was really broken because if it had incorporated security prices, if it had incorrectly incorporated the price of housing, residential real estate, then the Fed would not have been surprised before the financial crisis. .

So what they did after writing all these internal white papers and determining that they needed a new inflation regime was nothing. And because they needed to hide behind this broken model, which systematically underestimates inflation in order to maintain a more flexible monetary policy than they otherwise would in order to prop up the stock market. Many people who watch the Federal Reserve cite flaws in models like the Phillips curve. The Phillips curve is a model that economists use to make interest rate decisions. The model contains two input data: inflation rates and employment data. Various forces change where the economy is along the curve at any point.

When employment indicators point to a tight labor market. The Phillips curve graph shifts to the left. That means there are more jobs available than there are workers to fill them. That also increases pressure on employers to raise wages, which means higher inflation rates. The Federal Reserve can control inflation when it comes from the labor market. Your main tool for doing this is the federal funds rate. And by reducing that rate, it tends to help stimulate economic growth and job creation. And when they increase that rate, it tends to slow that growth and the resulting job creation.

The reason to do this would be if there were concerns that inflation would grow too quickly or potentially get out of control because the unemployment rate is too low and start to put upward pressure on prices because there is upward pressure on wages. Some economists believe that in 2019 the official models showed an error. That year, unemployment fell to 3.5%. When unemployment reaches this low level. The Phillips curve tells us that prices should start to rise. The Federal Reserve began raising interest rates before lowering them again during the pandemic. I think one of the things we've learned coming out of that recession and more recently is that the economy has probably moved further away from what a genuine level of full employment would be.

Some say that the failure to reduce interest rates is a mistake that the country will have to pay for in the future. Jay Powell in 2018 and 2019 found that he couldn't raise interest rates, so he didn't get interest rates to reach his stated personal goal of 3%. He never got around to it. When you have a Fed going through cycle after cycle, it's trying to solve an underlying debt overhang problem, whether it was the household sector before the financial crisis or the corporate sector before COVID hit. Every time they suffer a crisis, they try to solve the problem of debt overhang by putting more debt into the economy.

Others still believe that the country is in an extraordinary moment that requires emergency measures. The current environment we find ourselves in is extremely unusual. All of that is really affecting inflation in a way that we wouldn't normally see during the normal course of how the economy operates. In recent decades, external forces have fundamentally changed the world of work. When unions were a force to be reckoned with and when employees had the upper hand. Then there was a very close relationship between inflation and wage inflation, which is why we could have this spiral of wage increases. When we started to dehumanize the country, when employers started outsourcing to India and other countries and started exporting deflation because their labor was much cheaper.

All of these elements ended up giving employers an advantage over employees in the United States. So the effectiveness of the Phillips curve started to become somewhat outdated and there wasn't this immediate feedback effect of rising prices on rising wages. Policy decisions based on models like the Phillips curve have had a real impact on American workers. The wages and benefits of a typical worker were suppressed in the decades after 1979. Why is this? Well, it's not because the economy was performing badly, nor because of automation, nor because of low productivity growth. In fact, it was due to policies that created a situation where wages were suppressed.

Excessive unemployment due to. Failed macroeconomic policy. Monetary and fiscal policy to attack unions. The decline in union membership. The impossibility of increasing the minimum wage along with inflation. Several new corporation policies that force people to sign non-compete and forced arbitration agreements. As a result, leaders are making adjustments to prepare for the new normal. Longer-term inflation expectations, which we have long considered an important driver of actual inflation and global disinflationary pressures, may have been keeping inflation down more than generally anticipated. President Biden nominated Powell for a second term, hoping it would help the Federal Reserve maintain its independence.

I'm nominating Jerome. Powell. That will be important as the group embarks on an unusual new decade. So I think the strategy that the Federal Reserve is following now is as stated. The stated strategy is to try to keep the labor market really tight, really strong for a long period of time. ANDThat means we will then see stronger wage increases across all income groups, but particularly in low-wage companies. But you know, it is something complicated and very difficult to achieve. The Federal Reserve has kept interest rates near zero for more than a decade, and the outlook suggests it will keep them low for the foreseeable future.

This is because the United States and countries around the world have failed to meet their inflation targets in recent years. The Federal Reserve itself was previously incapable of creating inflation. It was, in quotes, pushing a rope. So he said, you know, we're going to allow inflation to run high in the future so that we can try to balance out all these years of not being able to produce the inflation that we said we wanted to achieve, being below that 2% target for so many years. In other words, if the temporary bottlenecks caused by the pandemic and supply chain disruptions disappear, we will need to keep interest rates low to keep the economy afloat.

Some say the Fed would be better off pursuing a higher long-term inflation target, possibly 3%, that can combat expectations of slow future growth. I think deflationary forces will continue to be a force, especially on the income scale. Now that you can put an entire law library on a small big data chip, you don't need a paralegal in the United States. You can get a paralegal in India. So the highest-paying jobs right now are the ones at risk of being sent overseas, and no one is talking about that. In fact, there will be inflation in terms of the amount of education needed in the United States.

You're going to need that graduate degree to have pure certainty of income security in the future, because you're going to need the next level of skills because a lot of jobs that require a bachelor's degree are going away. So that disinflationary impulse is going to be there. But in the short term, the Federal Reserve and the entire country will wait to see if these price increases occur. There is no direct, obvious way the Fed can help. Actually. I think the responsibility lies with Congress and the administration. Legislators have the tools and the capacity. I do not believe that the American Rescue Plan created this crisis or that the Federal Reserve's monetary policy created the inflation problem.

Your ability to change the interest rate would help somewhat. It would slow the pace of recovery. Central banks around the world have pumped money into the economy at a record pace to try to combat a global recession caused by the coronavirus pandemic. I just received news from the Federal Reserve, a. Explosive announcement from the Federal Reserve. It is an absolutely historic week, both for the speed of the Fed's purchases and, of course, for the magnitude. Since mid-March, the Federal Reserve's balance sheet has ballooned from $4 trillion to around $7 trillion, equal to about a third of the value of the entire U.S. economy.

The new CNBC survey shows market participants expect trillions more in stimulus from both the central bank and Congress. At the same time, governments have enacted record amounts of fiscal stimulus to boost economies stalled by the pandemic. The injection of cash into the financial system has renewed concerns that inflation could soar. As Milton Friedman said, inflation is always and everywhere a monetary phenomenon. If you believe that. If you look at the explosion of central bank balance sheets right now, you say there is going to be inflation. Supply shocks have driven up prices for some goods in recent months.

However, recent history suggests that inflation is more likely to remain low for a long time, as unemployment remains near record levels and consumer spending is subdued. While there are certainly plenty of shocks on the supply side of the economy, they are likely to be dominated by the huge impact on aggregate demand. So how will trillions of dollars of economic stimulus affect the inflation outlook? Inflation refers to an increase in the prices of goods or services over time. A well-known measure of inflation in the United States is called the consumer price index, or CPI. The CPI is about the prices we pay for services, goods, homes and rents.

Economists say some inflation is healthy for the economy. When the economy grows, more consumers and businesses spend money on goods and services. This increase in demand translates into higher prices. Demand is an important factor in the inflation outlook. Generally, when unemployment is high and consumer demand is weak, inflation is low. Another factor that affects inflation is raw material prices. If oil prices rise because there is a cut in production, gas prices could also rise. Consumer and business expectations about prices are another piece of the inflation puzzle. If many people expect prices to rise in the future, they might spend more now, ultimately causing inflation.

The level of actual inflation we obtain will be strongly influenced by the inflation rate that actors in the economies of households, businesses, consumers, workers and investors expect to prevail. Like many other central banks around the world, the Federal Reserve is targeting an annual inflation rate of 2%. At that rate, a cup of coffee that costs $2 this year would cost $2.04 next year. Not enough to break the bank. Central banks typically adjust their policies by changing interest rates to try to reach that 2% inflation level. You definitely have to maintain enough inflation to have enough room to increase and decrease the Federal Reserve's funds during the business cycle.

Too much inflation is not a good thing either. As inflation rises, money held today loses value tomorrow at a 15% inflation rate. For example, your $2 cup of coffee today will cost $2.30 next year. Think about how that would affect a larger purchase like a car. A $10,000 purchase today would cost $11,500 next year. When the inflation rate is very high. It is very difficult to make calculations about savings. Inflation concerns for now. Or on the downside, the risks are on the downside, not on the upside. We see prices going down and that's because in many parts of the economy people are cutting prices.

Lockdowns have already depressed prices in the United States as consumers stay home and are cautious about spending money in an uncertain economy. The second biggest drop in headline inflation since 1947 saw energy commodities fall 20%, with gasoline falling 20%. Fuel oil fell 15%. There have been pockets of inflation in some areas, such as groceries, as more people cook at home. Disruptions to global trade caused by the virus have also raised prices for goods such as medical supplies. Still, these supply shocks have not offset weak overall demand. If you're in the average person's seat, we're talking about grocery stores and that kind of stuff.

The idea that there is going to be an outbreak of inflation, 4%, 5%, is simply not on the horizon. Many economists and policymakers expect wages to remain low as long as unemployment remains high. Meanwhile, people are saving rather than spending their money out of fear that the economy could get worse. To try to boost the economy. Washington authorities have injected trillions of dollars into the financial system in recent months. Economic theory suggests that all this money printing could create the risk of inflation. Economist Milton Friedman famously said: If there is too much money in the economy to buy too few goods, prices will rise.

When inflation was rising in the 1980s, Federal Reserve Chairman Paul Volcker put Friedman's theory to the test. And it worked. Volcker slowed the growth of money entering the economy and raised interest rates to control inflation. But economists say there has been a breakdown in the link between money creation and inflation in recent years, as the banking system has become more complex. The rise of the financial system and its diversification is one of the reasons why Milton Friedman's worldview is not really as applicable, particularly in the United States, as it was in earlier times. It is important to understand that when the central bank prints money today, most of it is not in the form of physical dollar bills.

Instead, the Federal Reserve creates electronic money. It uses that electronic cash to buy assets and lend to banks, injecting money into the banking system to buy Treasury bonds. For example, the Federal Reserve uses so-called primary dealers, a group of about two dozen large banks and brokerage firms that trade bonds. What happens when the Federal Reserve creates money? Is that strictly what creates money or central bank reserves? These are in the hands of the banking system. Now banks decide what they are willing to lend to the economy. That means that even if the Federal Reserve is pumping a lot of money into banks like it does today, the money won't get into the hands of consumers until the banks lend it out.

It's true that money has been given directly to citizens as part of the federal government's response to the coronavirus, such as $1,200 stimulus checks. This cash injection may not yet generate inflation. Most Americans needed the checks to make daily payments and offset lost income during the crisis, not to go out and spend lavishly on other purchases. I think of them as more lifelines, trying to prevent the economy from falling into a deeper hole due to the COVID crisis. And they still do not represent a stimulus. Recent history suggests that all fiscal and monetary stimulus during the pandemic is unlikely to increase prices for consumers.

When the Federal Reserve bought trillions of dollars in assets after the 2008 financial crisis. Inflation never rose. After the Great Recession, there was a conviction that all fiscal and monetary stimulus was going to cause enormous inflation. In fact, several investors, including some very famous hedge funds, opted for gold. Well, what happened? Big deficits, but inflation is down. The experience of the last decade is that the expansion of central bank balance sheets certainly does not have to generate a period of excess inflation. And in fact, even with a large balance sheet, it can be difficult to achieve the inflation you want.

There are limits to what history can teach us when it comes to understanding the current economic situation. Even if the economic stimulus does not result in higher prices for consumers, many say that inflation is being reflected in the prices of other assets such as the stock market or the housing market. One of the most interesting questions we have now is the difference between the price inflation that you and I see in the supermarket or at the gas pump or when we buy something. That is a measure of inflation. But another measure of inflation that is also very important is asset price inflation.

In other words, what is happening with the stock market and what is happening with credit spreads? I think we are looking at very significant increases in asset price inflation. Inflation expectations are another risk. If people start thinking, oh, the money supply is increasing, inflation will be higher than expected, inflation will become high. Then you start asking for sharp increases in wages and prices. And these expectations become what we call. Self-fulfilling. Long-term. Factors such as globalization, technology and an aging population influence consumer prices. A weaker US dollar or a backlash against global supply chains that have been disrupted during the pandemic could create inflation risks.

If you sealed the borders and literally cut off imports and then embarked on this huge monetary and fiscal stimulus, yes, you could create inflation. There is another big risk to inflation, and it comes with nine zeros associated with record public debt. Trillions of dollars in economic stimulus during the pandemic have increased public debt at a rapid pace. In recent years, some economists have argued in favor of deficit spending to finance public investment, although many debate what effect this might have on inflation, since government debts are set at fixed dollar amounts and higher inflation makes make it easier to pay those debts.

Some worry that politicians could pressure central banks to pursue higher inflationto help finance the growing national debt. We shouldn't worry too much about the size of the Federal Reserve's balance sheet. What we need to focus on is whether the Federal Reserve will, at the appropriate time, have both the discretion and the institutional independence to raise interest rates, even if that might conflict with other interests, for example, the government's interest. of the day.