The Fed's 10x Playbook Created Price Inflation
The Fed 10x’d the U.S. economy.
What do I mean? The Fed grew its balance sheet by more than 80% year-over-year for each of the 10 months between May 2020 and February 2021, peaking at 86% year-over-year growth in June 2020. Consequently, price inflation as measured by the understated CPI metric sharply grew in 2021 and 2022, peaking at a 9% year-over-year price increase in June 2022. The Fed’s 86% peak balance sheet growth is approximately 10x the 9% CPI peak.
Applying the same principle to the Fed’s balance sheet runoff would suggest that the Fed’s current 10-12% year-over-year balance sheet decline may result in a 1-2% year-over-year CPI decline in February/March of 2025. The only way we get there is if the Fed maintains elevated rates through Q1 2025 - even if the economy shows further signs of weakness / recession.
