For reasons that I have described in previous posts, and will discuss in more detail at a later date, the Fed’s ability to control the current bout of inflation through interest rates is pretty limited; all it can do is reduce demand by driving down the markets and making investors feel poor. Will that happen, or will the Fed mostly ride it out and wait for conditions to improve?
At this point, I don’t know, but the truth should become apparent in the near future. One possibility is that the pandemic evolves into something less significant, supply chain issues are resolved, the Great Resignation comes to an end, and fiscal policy is tightened slowly; as a result, the markets thrive, inflation is brought under control, and we have a vibrant dollar store economy. The other possibility is a Fed-driven recession caused by a market crash.
Much depends on the answer to the question, including, but not limited to, the outcome of the 2022 election and the health of American liberal democracy.