Why did Jay Powell said on Wednesday that the FOMC committee may not be ready for a rate cut in March? The answer might be in the chart below: it shows inflation in the 70’s in the U.S. after the break of the gold standard, and you can see how the Fed, at the time, thought inflation was under control only to ramp up even further than before. In the current cycle, inflation has gone down mostly thanks to Energy and food, but core inflation is still elevated for Fed standards. The fear is that inflation picks up again and destroys the dynamic the Fed has created over the last 19 months. The risk, of course, is that higher for longer slows the economy further and we fall into recession, which will trigger QE again, fueling inflation and repeat the 70’s scenario. Timing is key, and that’s why the Fed will wait to take action.
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