I'm not sure I've seen this question answered here, yet.
First a brief economics lesson for the uninitiated. Economist, Irving Fisher developed a monetarist version Quantity Theory of Money which is readily used. I don't think it was meant to be a "precise" theory; it's meant to be simple but I think it generally holds. The calculation looks like this: M*V=P*T (Money supply X Velocity of money = Price level X volume of Transactions in the economy. What this shows is that when the money supply increases but the velocity stays low, you don't get price inflation. But if both money supply and velocity are high, price inflation is guaranteed. Austrians would argue that the reason you're not seeing the inflation in prices is because it's hitting certain sectors and not others. This time mainly the stock market. I believe both things are true. We know that the economists at the Fed are well versed in monetarist theory.
At any rate back to the question at hand...
I think we know the expected path the economy is going to take. With these trillions of new dollars printed, and the lockdowns to eventually fade (some places quicker than others), the velocity of money is going to pick up. So we're going to start seeing price inflation in the other sectors. And the government and Fed are salivating for that inflation. Who wouldn't want to pay off '20/'21 debt with cheaper '22 dollars? And it allows them to raise the interest rates to give them more levers in the future. So the question becomes, can they control the Velocity by adjusting the interest rate? Left unbridled, a "return to normal" is going to speed inflation (and if a new minimum wage law gets passed in the next 2 years, watch out!) They know an unbridled inflation rate would be distasteful to the American people, so they hope to raise it fast enough to give them their levers and debt service reductions, but slow enough to keep the people from dragging them through the street by their tongues. Preferably, the sweet spot is having the public just mad enough to ask for more increases in benefits due to the rising cost of living, but not mad enough to do that other thing.
So, do you think the interest rate rises will be enough for them to maintain that sweet spot? Or will it get away from them like it did in the 70's?
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