Without crashing the economy
Last year the major financial story was stubbornly high inflation. In 2023, we’ve seen continual improvements as inflation gradually returns to more normal levels (as we anticipated last November).
The most common measurements of inflation are trending back towards more normal readings.
To some extent, decelerating inflation was expected. The Fed raised interest rates at an historic pace to counteract soaring prices. But what wasn’t expected was a strong economy with improving inflation (the latest estimate for GDP is 4.1%).
This Goldilocks scenario we’re living through in 2023 has taken many by surprise.
That’s because the Fed and most everyone else thought that in order to tame inflation, we would need to weaken the economy and put people out of work. We think this mistaken view of what was to come is rooted in a false reliance on economic history.
In the early 1980’s, the Federal Reserve killed off the inflation of the time by purposefully driving the economy into recession. This was to be a model for what was to happen this time.
But is the economy of the United States (or the world) the same as in 1982? We don’t think so. The world isn’t divided as it was during the Cold War, the Internet has broken down cultural and linguistic barriers between people, and we are constantly connected with each other with computers in our pockets—mobile phones.
The world economy today is much more resilient, diversified and asset light than it was 50 years ago and the stock market has properly recognized that fact in 2023. The academics at the Fed just need to catch up with the new reality.