What Steve Hanke pointed out is that historically it took rates higher than the inflation rate to bring inflation under control.
So what makes the Fed and the markets believe that a hike to 3.2-3.5% is enough to do the job, worse still when the Fed's target remains at 2%.
Plus monetary policy takes time to take effect for demand destruction to bite, especially with remnants of pent up demand remaining and employment still remaining rather robust...therefore expect inflation to stay high for some time, Hanke thinks it could even be extended well into 2023 and even the year after.
So back to my question earlier, what would the Fed do if it reaches 4% and still unable to reign in inflation? Will it pivot then with mission unaccomplished and look terrible inept? And if it does pivot then, would that not be reflating the economy again and risk pushing inflation back to higher levels? So would the Fed be prepared to go even higher above 4% and try harder? They would not be losing as much credibility doing so as they can cite that inflation remains stubbornly high and staying the course with their hawkish policy remains the appropriate step. Imagine what that will do to debts and markets facing a full blown large rate hikes, which will also cause the US Govt $30Trillion debt interest payment to blow out big times and squeeze out their capacity for Govt spending.
Of course that being the scenario of inflation staying stubbornly high, Hanke believes so, but the market is not wanting to hear it.
