The great debate over inflation

This is Lee Clifford filling in for Sheryl today. If there’s one economic buzzword that has dominated the debate for the past several months, it’s inflation. Is it transitory? Is it structural? Is it accelerating? And most of all: What, if anything, does the Fed plan to do about it?

Investors got a few clues yesterday following the Fed’s meeting, but far from a complete picture. Fed Chair Jerome Powell noted in a press conference that overall inflation is “running well above” the central bank’s 2% long-term goal. “Our baseline expectation is supply [chain] bottlenecks and shortages will persist well into next year and elevated inflation as well,” Powell said. The Fed announced it would “soon begin unwinding the billions of dollars worth of U.S. Treasuries and mortgage-backed securities it has been buying up every month since the beginning of the pandemic, a significant step that Wall Street has been urging the central bank to take as inflation has remained persistently high,” according to Fortune’s Declan Harty.

That still leaves plenty of questions about the Fed’s options from here. Our Fortune colleague Shawn Tully dove into that topic. As Shawn writes:

What if long-lasting, structural forces are also at work, helping hike consumers’ bills for groceries, gasoline, cars and rent? The Fed has gigantically swelled the money supply to enable the multi-trillions in new spending and borrowing. It’s highly possible that the flood of freshly-minted dollars is stoking inflation. Wages that were long depressed as corporate profits soared are finally playing catchup, raising what companies charge for their products and services. On recent earnings calls, J.P. Morgan CEO Jamie Dimon and Bank of America chief Brian Moynihan both warned that their broad perspective on the economy tells them that faster-rising prices are here to stay, while former Treasury Secretary Larry Summers sees the threat of “runaway inflation.”

Shawn writes that the Fed essentially has two choices, and neither of them are particularly pretty. He interviews William Luther, an economics professor at Florida Atlantic University, and writes:

If strong inflation takes hold, Luther predicts, the Fed will face two options, both bad for the economy and stocks. “The first is that the Fed ‘sticks to its guns’ by pledging to wrestle the price trend back to 2%, and because it’s waited so long, must radically contract credit to get there,” says Luther. That course would cause a deep recession, pounding bonds and equities. In the second course, the Fed would simply accept and perpetuate the today’s higher inflation as a new normal. “The market participants would be expecting 3% inflation, and the Fed would meet those expectations by delivering 3% inflation,” says Luther. The appeal of taking that path: It would avoid an immediate recession. “The first ‘stick to your guns’ solution would be require such a steep downturn because the Fed delayed getting tough for so long,” says Luther. “It might take the second option because the harder something is to do, the the less likely the Fed is to do it.” Punting carries a cost. The central bank would be scrapping its longstanding, 2% goal, and adopting a new stance of tolerating high inflation to sidestep a recession. “That would greatly increase uncertainty for consumers, producers and investors,” says Luther. “They’d worry that the Fed is no longer credible, that it could let inflation get out of control.”

You can read the full article here. But in addition, we’re curious—what signs and signals of inflation are you seeing in your business? Drop Sheryl a line at the email address below with your thoughts. Thanks for reading, and Sheryl will be back tomorrow.

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Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

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Overheard

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