Thoughts on Inflation
So, using the Taylor rule and 2019 as the long run GDP number and 2021 as a proxy for expected 2022 GDP (which I know others will consider a questionable assumption, but it actually works against my case since 2022 GDP will be higher than 2021 most likely; the Taylor rule actually allows for a lower interest rate the more GDP is below long term trend), the target Federal Funds Rate should be 8.7%
Yeah, .5% (which is what the FFR will be after the Fed's next increase, correct me if I am wrong) is pretty far away from that. Inflation train is not coming into the station any time soon. Even if you attribute a lot of present inflation to supply chain issues, the numbers still seem pretty out of control. I could put in a real inflation rate of 4%, assuming most of the observed increased inflation is due to supply chain issues, and the Federal Funds target rate should still be be 3.14%, a far cry from where it is now.
Any way you slice it, it seems like inflation is going to be above long-term trends for quite a while.
General questions:
1) Why, in God's name, was the Fed buying MBS even in 2021 as we were witnessing record home prices? Were they worried about reducing the supply of T-bills during their open market operations? Someone please explain.
2) Does anyone have a good idea as to how much of the present inflation is Demand-Pull vs Cost-Push? It seems the economy is undergoing both simultaneously. If the supply chain issues are truly temporary, this has significant impacts on what the Taylor rule dictates the target Federal Funds Rate should be: If the causal role of the supply chain issue is exaggerated, then reaching Federal Funds Rate suggested by the Taylor Rule will become all the more difficult.
3) How does the present situation in Ukraine affect the estimation of Cost-Push inflation?
I am pretty certain we are screwed, but there are so many conflicting forces at play in the economy that determining just how screwed we are and for how long is not simple.