Thread by @Trinhnomics

Good morning ☀️Asia! Inflation expectations & why does it matter.

First, it is high at 6% in one year according to a Fed survey & twice income gains (expecting only 2.8%).

Meaning, people expect to be relatively POORER & able to purchase fewer goods!!!

So?

https://twitter.com/Politics_Polls/status/1469313183164903431

Inflation expectations are key to future inflation & that is why the Fed monitors.

People’s expectations lead to reaction. If they think CPI is gonna be 6%, they’d want a raise to feel less poor & so everyone doing so leads to inflation.

So the Fed is worried & should be!

The Fed uses words like anchoring inflation expectations around 2%. The word anchor means u wanna not let it go out of control because once inflation expectations are rampantly high, it feeds into itself & hard to control.

So at 6.8% & expectations elevated, the Fed needs to act

How is it going to act? First, this much we know: it will fasten tapering to end around March (well, likely).

Second, policy rates still at zero bound while inflation is running hot 🥵 🥵 at 6.8% & not anchored at all at 2%

So rates liftoff in question here. How will it do so?

Whatever it will do, remember that inflation is politically toxic. And the longer politicians or bureaucrats or monetary officials pretend it is not their fault/problem, then, they will face the consequences of an angry mob. Blaming supply shocks isn’t enough. Stop 🛑 doing that.

Because people don’t get top jobs blaming things they can’t control & playing the victim game. They get it to manage risks. Here u will see that we’re past the narrative game & transitory is dropped. We’re at the saving your career & credibility bit for the Fed & also politicians

And so Jerome Powell will save himself & the Fed. What about the President & the Democrats facing mid-term elections & 2024?

My advice is to start fighting inflation as if you are putting out a fire 🔥 because it is politically toxic. Start talking actions.