Because that’s what happened in 2008. Nevertheless markets went into meltdown which caused inflation to collapse. It’s also what happened to Volcker in 1980 and he was forced to boost rates later within the 12 months
THIS balance sheet is the epicenter of the Fed’s policy error dating from 2020 to now. It increased 100% throughout the pandemic and it has only come down 5% for the reason that Fed began tightening. It’s the SOLE source of monetary inflation
The Fed has now raised its policy rates by 500 basis points in slightly over a 12 months, with the high quality now at 5.25%, and with the Effective Federal Funds Rate at 5.08%. But “core” CPI, which excludes the volatile food and energy components, has gotten stuck at around 5.5% to five.7% for the fifth month in a row. There wasn’t any progress in any respect with core CPI in five months. Inflation intensity is solely shifting from one category to a different. As inflation temporarily subsides in a single category, it resurges in one other.
The Fed’s short-term policy rate, as measured by the Effective Federal Funds Rate (purple), continues to be below inflation, as measured by core CPI (red):
With core CPI at 5.52% in April, the “real” Effective Federal Funds Rate (EFFR minus core CPI) continues to be a negative 0.44%. And negative real policy rates are still a type of rate of interest repression, and are still stimulative of the economy and of inflation.
And so core CPI got stuck at 5.5% to five.7%, and isn’t making any efforts to be heading toward 2% or whatever, and as an alternative, everyone has gotten used to this inflation and accepts it, and deals with it, and builds it into economic decisions, which is nurturing this inflation right along.