Like a California wildfire, the Inflation fire is just starting, but in due time it will consume billions of dollars’ worth of material and resources. Considering that the US economy is $20 Trillion in size, each percentage increase in inflation corresponds to hundreds of billions of dollars in GDP, when comparing the “nominal” GDP to the “real” (inflation adjusted) GDP.
When it comes to protecting the long-term economy, that is one of the charter responsibilities of the Federal Reserve. Their mantra of targeting a 2% inflation rate is in part a balance between the severe consequences of rampant inflation (e.g., the “Great Inflation” of the 1970s), and the even worse consequences of uncontrolled deflation (e.g., the “Great Depression” of the 1930s).
As a relatively new and untested Chairman of the Federal Reserve, Jay Powell is about to be put to the extreme test of choosing between two very difficult alternatives. He must choose between reacting to the recent declines in the stock market, and backing off on planned rate hikes from now to the end of 2019 and possibly the beginning of 2020, or to continue those rate hikes in order to keep the economy from becoming overheated and starting the next inflation wildfire. This decision is made that more difficult by the pressure President Trump has been putting on him, in calling for an end to interest rate increases by the Fed.
The only question is, which route will Powell take: 1) sacrificing the stock market for the long-term stability of the economy, or 2) sacrificing the economy for the short-term stability of the stock market?