The Fed May Be About to Make a Mistake

The natural state of a capitalist economy is expansion. Recessions occur when “something breaks” rather than an expansion simply dying of old age. Unfortunately, central banks have a history of pumping the brakes for too long and too hard when attempting to contain growth and inflation and are often the cause of a recession.

Given that the Federal Reserve has now shifted away from its so-called third mandate of financial stability, which dominated much of the post-crisis period, and back to worrying about faster inflation, concern about too much tightening is warranted. While inflation is indeed accelerating, investors remain skeptical that higher prices are returning with the vengeance needed to justify the several more interest-rate hikes the Fed is talking about. We fear another Fed mistake is in the offing.