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How worried should you be about inflation?

In a heartening demonstration that hope springs eternal, Fed chair Jay Powell went before Congress today to say that despite the Consumer Price Index and Producer Price Index coming in much hotter than expected, he remains untroubled. Sure the Fed underestimated the power of the inflationary forces that the combination of zero interest rates, $120 billion a month in bond purchases, and a promise to ignore inflation would summon forth from our darkest path. But the public should "have faith," as Powell put it, in the Fed's ability to stomp down inflation if things get bad enough.

There are two problems with this. First of all, Powell's term ends early next year. So even if he would be the inflation fighter he promises to be, we do not know if he'll be around to get things in motion. A Biden appointee who replaces him would be extremely unlikely to hike rates in an election year no matter how bad inflation got.

Second, while it is probably still true that the Fed can effectively fight inflation, the history of this is not really all that comforting. All too often the Fed has had to throw the economy into a recession to stifle price hikes. Coming so soon after our pandemic-lockdown recession, another downturn would be economically traumatizing.

On the other hand, Powell's policy is likely good for the stock market. Recall that equity in a business is a real asset, a category of things whose value tends to rise in inflationary periods. When stocks don't rise in an inflationary period, that's typically because investors anticipate higher interest rates, which lowers the value of discounted future cash flows that the textbook tells us are the bedrock of stock values. But if you get inflation plus a promise that rates will stay low, well that's very good for stocks.

– Alex Marlow & John Carney
Breitbart News Network