The myth of hyperinflation series- #1 Fed's decision
Even as Fed balance sheet keeps climbing up and U.S takes on more national debt in the current low-interest rate environment, I am not eager to jump to the premature conclusion and entertain the idea of hyperinflation.
I'm not saying that it is improbable, I am just saying that it is an unlikely and low-probability event. Yes, it is a fat tail risk that shouldn't be overlooked because it comes with the devastating consequence. However, several conditions and criteria need to be met before we can even realistically begin to talk about the probability of hyperinflation.
Federal Open Market Committee's (FOMC) recent decision to keep the fed fund rate unchanged within the target range of 0-0.25% pretty much signaled FED's intention to hold rate effectively to zero until 2022, for at least two years. why? Based on the CPI of the past decade.
Since great recession ended in mid-2009, inflation has stayed below 2% for all but two years, therefore; Fed is more worried about disinflationary risk than inflationary risk.
Fed's initiative of "average inflation targeting" is determined to hit 2% inflation while keeping the employment low. Since Fed has been missing its inflation goal for a decade, people speculate that Fed may let the inflation run up to 3% or 4% to make up for it being below 2% for so long, thus triggering and opening the doorway to the potential hyperinflation.
While such theoretical risk is not completely unfounded, the fact remains the same that we need to have the inflation first before we can have hyperinflation.
Next, we will look at Fed's tools and to what extent Fed can influence the market.
I'm not saying that it is improbable, I am just saying that it is an unlikely and low-probability event. Yes, it is a fat tail risk that shouldn't be overlooked because it comes with the devastating consequence. However, several conditions and criteria need to be met before we can even realistically begin to talk about the probability of hyperinflation.
Federal Open Market Committee's (FOMC) recent decision to keep the fed fund rate unchanged within the target range of 0-0.25% pretty much signaled FED's intention to hold rate effectively to zero until 2022, for at least two years. why? Based on the CPI of the past decade.
Since great recession ended in mid-2009, inflation has stayed below 2% for all but two years, therefore; Fed is more worried about disinflationary risk than inflationary risk.
Fed's initiative of "average inflation targeting" is determined to hit 2% inflation while keeping the employment low. Since Fed has been missing its inflation goal for a decade, people speculate that Fed may let the inflation run up to 3% or 4% to make up for it being below 2% for so long, thus triggering and opening the doorway to the potential hyperinflation.
While such theoretical risk is not completely unfounded, the fact remains the same that we need to have the inflation first before we can have hyperinflation.
Next, we will look at Fed's tools and to what extent Fed can influence the market.
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