Great expectations often lead to disappointment. No, I’m not talking about the Dickens novel – Pip would never disappoint. I’m talking about real life.
We are in the midst of an economic recovery from the reaction to Covid-19, and expectations are getting great. The Fed has said it foresees 6 percent economic growth. When most people hear that they probably celebrate, but when I hear that I immediately think: We could grow at 5.5 percent and Wall Street will be disappointed.
The Fed has kept the gas pedal to the floor and says they no longer care about short-term inflation but will keep the money loose until people get back to work. At the same time, the administration and Congress are passing relief packages seemingly designed to stop people from going back to work. These policies have the potential to lead to permanent higher unemployment and easy money, which could lead to inflation. The Producer Price Index, which tracks wholesale prices, is up more than 4 percent over the last year, and the recent reading for the Consumer Price Index was 2.6 percent – more than half a percent higher than the Fed’s long-term target.
Is inflation solely a monetary policy issue, or is it the combination of loose monetary policy with big government spending? I don’t know the answer, but this is a question that must be asked.
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