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Entering 2022, war in the Ukraine further fueled commodity inflation, turning the Fed into inflation slayers using monetary policy again, yet this time not to create inflation but to smother it out. What the Fed forgot is that when inflation is allowed to run hot, a flame could ignite which could be difficult to extinguish.Īs 2021 matured, the Fed capitulated, walking back the view that the rising inflation was transitory. The Fed felt compelled to further stimulate the economy, delivering a message that they were content to see inflation “run hot” for a while and that any excessive inflation would be transitory in nature. Deflation can be worse than inflation, particularly when interest rates are historically low.Įnter 2020, COVID caused the shortest recession in history, the Fed Funds rate was lowered to near zero, and the annual inflation rate pulled back to 1.2%. Many were of the belief that technological evolution was capping inflation, perhaps causing the Fed to fear deflation rather than inflation. However, in 2019, inflation slid back below the 2% target dropping to 1.8%. In 2018, inflation experienced a moderate year-over-year rise in inflation to 2.44%. Inflation was 2.1%, which in Goldilocks’ terms can be considered “just right”. Between 20, CPI ranged between 0.12% to 3.1% with an average of ~1.6%. inflation rate, as measured by the Consumer Price Index (CPI), was often stubbornly low versus the Fed’s target of 2%. Although investment assets were inflating, the U.S. In 2017, the global investment markets experienced a synchronous rise due to improving economic conditions, years in the making post the great recession.
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The present high inflationary environment has been stoked by multiple factors, a major aspect being low interest rates for an elongated period along with government stimulus.
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Although Goldilocks has taken a hiatus, that doesn’t mean the path to wealth preservation has eroded, but the trail does have more twists and turns. Given the paradigm change due to high inflation, and the Federal Reserve response, we are indeed in a different environment. Absent some blips, the financial markets enjoyed a Goldilocks environment for well over a decade, defined as a well-balanced economy supported by moderate economic growth and low inflation (not too hot, not too cold).