Rising Inflation Will Force the Fed's Hand

The problems faced by new U.S. President Joe Biden would be formidable for anyone. There’s the political schism that won’t be cured by optimistic calls for unity. Then there’s the herculean challenge of stopping Covid from killing too many more people. High up on his list, and sooner rather than later, will be dealing with the consequences of the biggest financial bubble in U.S. history. Why the biggest? Because it encompasses not just stocks but pretty much every other financial asset too. And for that, you may thank the Federal Reserve.

The fallout from a Fed that has encouraged investors into buying horribly overpriced assets will be every bit as difficult as coming off the gold standard in the early 1970s or tackling runaway inflation in the early 1980s. It will require an act of political will and a complete rethink of monetary policy. Having Janet Yellen, a former Fed chair, as Treasury Secretary is unlikely to help. She was among a long line of Fed bosses, from Alan Greenspan on, who reacted to each crisis by slashing interest rates and, over the last decade or so, massively expanding the Fed’s balance sheet.