How Long Will It Take To Tame Inflation?

A question that may be on a number of people’s minds is: How long will it take to tame inflation? Unfortunately, there is very little telling how long it will take the US Federal Reserve, or any other entity or force, to tame inflation especially with respect to the short-term. Part of the reason is because inflation is always part of a complicated economy – an economy with diverse people, businesses, and governmental/fiscal forces in action. Making timing (and hard landing/soft-landing) predictions about inflation is nearly impossible.

To add to the confusion, believe it or not emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle, inflation has stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation will not go away quickly. The US Fed had stated one of its original intentions was to lower consumers’ inflationary expectations (but the Fed may have missed this boat due to forces out of its control, namely, the pandemic aftermath).

These are not excuses for the Fed; these concepts have been around for decades dating back to at least the 1970’s and earlier. As recently as the early 2000’s which experienced a recession following the dot.com bust, economists and market experts factored in two years or more for changes in Federal Reserve interest rate policy to trickle into and improve economic conditions.

Will it take two years for Fed interest rate changes to make a difference in today’s economy? Probably not – and the only reason for this guess is that everything moves faster now than in 1970, 1980, 2002 and even 2013 (when the term “taper tantrum” was coined). But faster does not always mean the result is immediately better.

Today, in 2022, the Fed is attempting to normalize its benchmark short-term interest rate nearer to an average level of around 4.61%. Compare this average to the near-zero rate in the benchmark rate from 2009 to 2021 (which means that prior to 2009, the average short-term interest rate was even higher than 4.61%!).

In moving more quickly to set higher levels of interest rates, the US Fed seems to be trying to speed up the process of lowering inflation. The short-term stock and bond market reaction has been harsh. It remains to be seen how the “medicine” of more normalized (read: higher) short-term interest rates will affect the “patient”, or the economy and market participants and investors. The timing may be at least a year from now ­– positive or negative for the markets – to see ultimate results of the Fed’s attempts to slow inflation quickly.