The United States is embarking on the biggest economic experiment since the 80s – it is willing to let inflation overshoot the target as it delivers huge fiscal and monetary stimulus. Under Trump’s administration, the Fed acted swiftly and opened up USD swap lines with other major central banks in the world. The idea was to flood the financial markets with enough dollars so that the strains on the system will ease. They did – the program had massive success.
Next, Congress delivered an impressive fiscal stimulus. Direct checks, or helicopter money, as economies call the phenomenon, arrived promptly in the form of weekly checks sent to Americans. Yet, all measures taken in 2020 dwarf what is about to come. Coupled with the Fed’s new Average Inflation Targeting (AIT) mandate, the fears of excessive inflation mount.
Betting Against the Odds
Since the 80s, the world’s central banks have feared inflation. As part of every central bank in advanced economies’ mandate, inflation is desired around 2%, slightly more or less, depending on the jurisdiction.
Suddenly, the United States is betting against what it stood for in the last four decades. This coming from the most proactive central bank in the world is a signal economists and traders would not want to ignore.
Under Ben Bernanke’s guidance, the Fed embarked in unconventional measures in the aftermath of the 2008-2009 Great Financial Crisis. Think here of Quantitative Easing (QE), helicopter money, and any other measure that goes beyond simply lowering rates to the lower boundary.
That worked well for a while, but here we are, a decade after, with a bigger issue ahead – the economic recovery after a pandemic. Could it be that the United States is taking a similar role and leads the world to a new path forward?
By betting against what it stood for in the last decades, the United States is betting against the odds of controlling higher inflation. History suggests the Fed will have troubles in doing so and that inflation will likely show its teeth even starting with this year. Yet, instead of acting to temper it, America doubles down – not only that the Fed will not do anything about it, but the Congress is about to act even bigger than it did the previous time.