Inflation and the Fed's actions (or reactions)

I posted this about 8 months ago on Linkedin. I really thought that the Fed would have moved more swiftly to bring down inflation. Perhaps the Fed did not anticipate the impact of Russia's invasion of Ukraine.

Are we repeating 1970s-style inflation that took home prices with it? Not likely or hopefully not.

Similar to the 1970s, we are recovering from a recession. In both instances, the Fed loosened monetary policies, which led to high inflation. Home prices increased significantly higher and longer in the 1970s than what we have seen this year. Ultimately, home prices increased slowly by the early 1980s, and inflation returned to a steady increase with a tighter monetary policy.

As we expect to see the Fed tighten its monetary policy next year, we should see slower growth in home prices and hopefully a much slower increase in inflation.

When looking at the price index of the single-family house under construction, home prices increased much higher in the 1970s. That has to do with how the Fed kept its monetary policy loose even when inflation increased drastically. The US government feared returning to recession more than inflation. It resulted in a sharp increase in inflation for many years.

 I believe as the Fed starts to pull back on its assets purchases, everything will slow a bit. However, the US government is more scared of recession than inflation, just as it did in the 1970s. How much pull back and how fast could determine whether we might see a prolonged inflationary pressure. In 2020, the price index of the single-family house under construction increased by over 2%. This year the price index increased well over 4%. If the Fed decides to hold back and keep its policy, we could continue to see the prices increase just as they did in the 1970s.

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