I think the big elephant in the room missing in your analysis is the role of fiscal policy. No doubt that FED has been too cautious in starting the tightening cycle BUT inflation was driven mainly by fiscal. At the onset of the crisis that might not have necessarily been a bad policy. Better running the economy hot during a pandemic (one in a lifetime event) rather than hot in a boom (Trump) or dump the economic burden on citizens (GFC). Unfortunately supply shocks due to covid and Russia compounded the inflationary bias even further. Personally I don't think in the next economic downturn there will be the political appetite for fiscal stimulus in the same size seen during the covid crisis. If that's the case, the FED toolbox might retain its effectiveness.
I don't disagree with you at all - I think 2020 was the absolute right decision to go all in - but when we got big fiscal in 2021 + vaccine + an economy that had adapted to mobility restrictions - doing more monetary easing in 2021 than 2020 unquestionably created inflationary risks - would we still have inflation above target due to supply/chain and Ukraine? absolutely, but the central bank would not be in panic mode like it is now - next downturn - hard to know when it comes and what causes it (I have my opinions) but what I'm highlighting is deflation fighting tools aren't going to receive the same reception like they did last decade - if there is no fiscal it will be opportunity to fade the quick reversal of policy that will be priced in - but if we get fiscal all bets are off ...
100% agree with you. I just wanted to highlight the importance of fiscal policies. The FED will have to face some really tough choices if we get decent fiscal stimulus in the next downturn. Things could turn really bad.
I think the big elephant in the room missing in your analysis is the role of fiscal policy. No doubt that FED has been too cautious in starting the tightening cycle BUT inflation was driven mainly by fiscal. At the onset of the crisis that might not have necessarily been a bad policy. Better running the economy hot during a pandemic (one in a lifetime event) rather than hot in a boom (Trump) or dump the economic burden on citizens (GFC). Unfortunately supply shocks due to covid and Russia compounded the inflationary bias even further. Personally I don't think in the next economic downturn there will be the political appetite for fiscal stimulus in the same size seen during the covid crisis. If that's the case, the FED toolbox might retain its effectiveness.
I don't disagree with you at all - I think 2020 was the absolute right decision to go all in - but when we got big fiscal in 2021 + vaccine + an economy that had adapted to mobility restrictions - doing more monetary easing in 2021 than 2020 unquestionably created inflationary risks - would we still have inflation above target due to supply/chain and Ukraine? absolutely, but the central bank would not be in panic mode like it is now - next downturn - hard to know when it comes and what causes it (I have my opinions) but what I'm highlighting is deflation fighting tools aren't going to receive the same reception like they did last decade - if there is no fiscal it will be opportunity to fade the quick reversal of policy that will be priced in - but if we get fiscal all bets are off ...
100% agree with you. I just wanted to highlight the importance of fiscal policies. The FED will have to face some really tough choices if we get decent fiscal stimulus in the next downturn. Things could turn really bad.