Loading ...The Fed is wishful thinking if it actually believes it will stabilize inflation back down near its 2% target. For a few decades, the Fed has had the luxury of directing its policy focus to the financial markets. Consumer price inflation was relatively contained and stable. It was also aberrational.
The inflating global Bubble backdrop created the perception of an expanding economic pie. The forces of cooperation and integration were powerful. Importantly, China, benefiting from the confluence of unlimited cheap finance and globalization, unleashed a historic investment boom. The resulting massive increase in the supply of low-cost manufactured goods (from China and EM more generally) was fundamental to subdued consumer price inflation in the face of historic Credit excess.
The anomalous inflationary dynamic, with asset prices rising more forcefully than consumer prices, proved powerfully self-reinforcing. Global liquidity excess fueled the ongoing investment boom, stoking both growth dynamics and insistent asset inflation. Downward pressures on goods prices, a key inflationary dynamic, were misinterpreted as manifestations of deep-seated disinflationary forces. Then, as asset Bubbles inevitably faltered, the battle cry quickly turned to a whatever it takes fight against the scourge of deflation. Increasingly fanatical monetary inflation repeatedly revived Credit, asset and economic Bubbles.
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