YOU DON’T SAY: The Fed could be facing a nightmare scenario. “There is a much more worrisome scenario, however, in which US inflation remains stubbornly high, perhaps because the combination of continued tight labor markets and elevated living costs fuel persistent rapid wage growth. Such a wage-price spiral would pose a difficult conflict between the policy needs of the US economy and those of the rest of the world. Further increases in interest rates would be essential to bring down US inflation and inflation expectations. But at a time when many of our trading partners were mired in recession, further policy tightening could create grave problems abroad: substantial job losses, widespread defaults and disruptions in international financial markets.”
Left unsaid: The federal government can’t afford prolonged tightening because of increased interest payments on $31 or so trillion in debt.