The Fed slams on the brakes.
For a decade America experienced low consumer goods inflation, but high and rising asset inflation. The Federal Reserve had a policy of very low interest rates. It had the desired effect of keeping economies humming and the "animal spirits" of entrepreneurs energized.
When businesses and investors are being exuberant, they tend to be indiscriminate about it. With interest rates at zero every investment looked good--or at least better than nothing, the yield on cash. Stock prices were high, house prices were high, startup businesses had high valuations. Speculators had even bid up the prices of assets that are essentially imaginary: Crypto-currencies and Non-Fungible Tokens.
Policymakers didn't worry much about asset inflation. People like getting richer. It was miserable for young people trying to buy a first home, but bonds are an asset, too, and like other assets, their prices were high. (High bond prices is another way of saying low interest rates.) Young people could buy expensive houses with a manageable mortgage cost, when amortized over 30 years at 3% to 4%.
The Fed, encouraged by the whole political and social environment, created too much money and left interest rates too low for too long. How could that happen? I blame everybody for being in on it. Biden. The Fed. Politics. Democrats. Republicans.
After the Financial Crisis of 2008-2009 policymakers realized they had been too cautious. Demand had been destroyed. Banks were shamed by the careless loans they had made, so--now chastened--they were reluctant to loan money to anyone. The GOP blocked spending on infrastructure that might give then-president Obama a "win." It meant there was a recovery, but a painfully slow one.
Trump was elected. Republicans, then controlling all three chambers of government, said, "Now, let's spend." A theory emerged to justify it: MMT, Modern Monetary Theory. It asserted that deficits don't matter. The supposed party of fiscal restraint, Republicans, saw an opportunity to make Trump more popular. It worked. Democrats didn't push back on spending. Democrats are always ready to spend. After all, there are problems to solve.
Then Biden got elected. Republicans rediscovered fiscal discipline, but Democrats were in a narrow majority and had learned the lesson from the Obama and Trump experiences. Stimulate! The problem is that in the supercharged and stimulated COVID world there is no lack of demand. COVID created a lack of supply. In America and around the world, producers and shippers of physical things remain disrupted. War in Ukraine exacerbates matters. Americans have more money and fewer things to buy. The result is inflation.
Inflation of consumer goods is not an American problem. It is a world problem. United States' inflation is squarely in the middle of peer countries.
There is a world price for most tradable products. Biden is paying a political price. He campaigned saying he would stop new oil leases on federal lands, and that creates a compelling target for blame. American oil companies have massive opportunities for new drilling. They aren't doing it because $120 oil, and minimal new drilling costs, is wildly profitable for them. They are doing what companies do in a capitalist economy: Maximize rewards for shareholders.
The supply-demand imbalance means inflation. Americans don't like it when it happens here to consumer goods. The Fed is trying to fix it by raising interest rates. This changes investment opportunities and investment and consumer psychology. Investors who want a safe place to park capital can once again get a return from cash, and not feel forced to place it in risk assets. It means that the future potential income from businesses will be discounted back to the present by a factor bigger than zero. That lowers their present values, which shows up as lower stock prices. Businesspeople are looking ahead and thinking things will be slower, harder, and more expensive. That psychology means people defer investments and projects. Enthusiasm turns into caution. The cause and effect are complicated and uncertain, but the world tends to work in this order:
The Fed raises interest rates.
The stock market cools.
Consumers and businesses get more cautious.
The economy gets sluggish or falls into recession.
Inflation moderates.
This is a grim outlook for Democrats. There are political consequences. In 2022 Democrats will be blamed for inflation. In 2024, Democrats will be blamed for the recession.
Very good analysis, with few exceptions - there are no absolutes of course in any complex system, like the economy. and things are much different for my business as a small business with no debt or investors (vulture capitalists) ,on purpose, looking to expand right now with new opportunities