Commentary
High inflation has harassed the world for over a year. It’s troubling that although the financial market has come down significantly, against a backdrop of aggressive interest rate hikes, the latest economic figures show that a recession is not imminent–especially as both non-farm payroll and unemployment rates are still very healthy.
This means that rate hikes will not end soon. Moreover, there is a high chance that the Federal Reserve (Fed) will overdo it on interest rates, because the policy effect has a 1.5 to 2 year lag, meaning it will not be realized until fall of 2023.
Thus, whether the Fed misjudged the medium-term (1.5 to 2 years ahead) inflation outlook again is the key concern. Given the policy effect has a time lag, inflation should, in principle, have peaked. It should come down soon, as broad money (M2) growth slowed down sharply starting in April 2021—already more than 1.5 years ago. However, the uncertainty of this kind of lead-lag relationship is high, so it’s hard to predict accurately when inflation will decline. Moreover, the expected falling speed of inflation is not tightly correlated with that of M2….