December 22, 2023

Although the Fed is on the right track, the path to a 2% inflation rate will be a slow one. The reduction in the balance sheet and its components has resulted in a decline in M2. If inflation is a monetary phenomenon as we surmise, the negative M2 growth rate and an expanding economy should result in a decline in the inflation rate. However, given that the negative M2 growth rate has stabilized and so has the US inflation rate, it makes sense to argue that the inflation rate decline will continue at the current pace. The Fed will attempt to engineer a soft landing and will not risk pushing the economy to the brink of deflation in order to hit the 2% inflation target by the election, nor will it want to be blamed for a recession should one materialize. Hence, we look for a timid Fed that will err on the side of caution, resulting in an improving yet above 2% inflation target.

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