We are not far off on our thinking. I agree this is the correct approach, but disagree that the fed wants or will allow it. The fed doesn’t actually care about inflation that much. They care more about jobs. If unemployment rate is too low, the fed will tighten. If unemployment rate is too high, they will loosen. Ultimately, this is done in order to keep production high and globally competitive. Inflation is a secondary concern, and is preferred by many. The government always pushes for more inflation.
I agree and disagree. I think Powell is ok with a rise in unemployment pretty close to that 5% number, closer to historical averages. Historically when unemployment rate rises tho, it doesn’t happen slowly. It’s a slow plateau followed by a very sharp increase. Every sharp increase since the fed became a thing has been followed by sharp rate cuts. I agree that when push comes to shove the fed will blink and cut rates to satisfy a weak job environment, in that scenario.
However I do think Powell is willing to stress the market pretty close to that breaking point, moreso than prior fed chairs. There were two consecutive job misses q3 last year and even with that the fed stayed flat with policy. In the Q/A someone asked about it and he gave a really blunt , “it’s fine” lol.
Tangent warning :
If we zoom out I do think we have to ask ourselves where in the cycle are we? There WILL be another recession, whether it’s a year away, 5 years, 10 years etc. at which time there is going to be gdp contraction and if we are solely relying on gdp inflation to minimize the debt number, there will be a point that gdp falls and the debt really is a problem you will need to deal with. I don’t think This non stop kicking the can down the road experiment will go on forever