In doing so, the Fed indicated that it was prepared to forgive above-target inflation to compensate for years of below-target inflation. But there is an added complication – the Fed’s belief in the magical powers of its balance sheet. And for both the conventional benchmark policy interest rate and the unconventional balance sheet, the Fed has yet to figure this out. Now the Fed must normalise in the face of an inflation shock. The Fed views normalisation simply as a reverse operation – reining in its balance sheet first and then hiking the policy rate.

Source: Stuff November 23, 2021 08:26 UTC