Will they or won’t they?
This is a very significant discussion because of the fact that we may or may not be at an economic-policy turning point.
There has been a pattern for almost 40 years of the Fed easing monetary policy every time there was a downturn in the markets and/or the economy. They were able to implement an extraordinary amount of monetary stimulation because the inflation rate was low. In fact, a case can be made that they did so explicitly to avoid the deflationary forces that have been underlying the economy.
Critics have warned that the ultra-low interest rates would lead to a build-up of debt and ultra-high “quantitative easing” would eventually foment inflation.
Now the debt and inflation are evident. But current developing weakness in the economy puts the Fed on the spot. Will they ease again via stimulative monetary policies? Or will they, for the first time in forty years, be unable to (due to concerns about spurring even higher inflation)?
They had gone on record with intentions to start normalizing interest rates (from zero percent toward three or four percent) and reduce their balance sheet (from $9 trillion back toward a more normal $1 or $2 trillion). The process ostensibly started this month. But will they carry it through or will they revert toward the abnormality of the past few decades? If they go in the latter direction, will inflation soar out of control?