A big misconception about the Fed's fight to bring down inflation 🙃
This is not 'immaculate disinflation' 🎈
I won’t name names, but plenty of pundits have been arguing the only way the Federal Reserve can get inflation under control is by forcing the economy into a recession. And therefore, the central bank would actively work toward manufacturing a recession.
I’ve long believed this was one of the bigger misconceptions about how the Fed intended to bring down inflation.
Here’s what I wrote in the May 19, 2022, TKer as the Fed embarked on an aggressive campaign of interest rate hikes:
Keep in mind that the Fed’s ultimate goal isn’t to slow the economy. Its ultimate goal is to cool inflation. Using policy tools to slow the economy is just a means to achieve those ends.
And so before the economy slows too much, it’s quite possible that supply chains improve, inventory levels correct, and job openings get filled, which could help ease inflation from the supply side.
On Wednesday, we learned the consumer price index (CPI) in June was up 3% from a year ago, the lowest reading since March 2021. Excluding food and energy prices, core CPI was up 4.8%, the lowest since October 2021. Month-over-month figures similarly confirm cooling prices.
Indeed, the June jobs report on Friday showed the unemployment rate continues to hover near 50-year lows at just 3.6%.
How did this happen?