Inflation Through the Lens of History
EXECUTIVE SUMMARY
- The Taylor rule suggests that further monetary tightening is necessary to address the current bout of inflation. In addition, low unemployment gives the Federal Reserve scope to hike rates further.
- However, compared with other episodes of inflation since World War II, the sensitivity of the U.S. economy to higher interest rates is exceptionally high.
- Thus, the Fed faces a dilemma: If it is unflinching in stanching inflation, all risk assets could experience a brutal sell-off; if, as we believe, the cost of controlling inflation is too high, then inflation could remain elevated for longer, which could bolster real assets.
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