Take your pick: inflation or recession. Or, if your outlook is especially surly, perhaps you’ll opt for choice three: a bit of both, otherwise known as stagflation.
We’re not sure which one will prevail and, unfortunately, neither does the central bank. If pressed, our prediction is one of modestly slower growth, which might take the edge off inflation without derailing the economy. The lesser of several evils, if you will. But is that just wishful thinking? Who knows? In times like these, when well-founded assumptions about the morrow fold like cheap cameras, one has to take predictions with an increasingly skeptical mindset. And why not? That’s the nature of the future: it’s unknown, leaving investors, central banks, butchers and bakers with the unpleasant task of guessing, or forecasting, as it’s called in civilized conversations.
But no matter what you call it, the Federal Reserve has no choice but to indulge in it, for better or worse. Even under the best of circumstances, divining the future so as to reverse engineer an informed monetary policy today is a job with more than a trivial dose of risk. With disinflationary winds blowing hard in recent years, the job has looked easy in hindsight. But the jig is up and a far more complicated and risky climate has imposed itself on the business of central banking. Volatility has returned with gale force winds in some corners of the capital markets. The Fed has only a supply of blunt weaponry to battle the storm, but one makes due with the arsenal at hand.