Inflation could provoke a Federal Reserve policy mistake

'Inflation scare'

Interest Rate Policy and the Inflation Scare Problem, written by US economist Marvin Goodfriend in 1993, is a must read for today's investment community given its relevance in current market conditions.

Inflation and a potential bond crash have been the biggest tail risks mentioned by investors since the beginning of the year. "Inflation scares are costly because resisting them requires the Fed to raise real short rates with potentially depressing effects on business conditions," he wrote. With this in mind, inflation could therefore provoke a Federal Reserve policy mistake and put a premature end to the current growth cycle. If not rapidly contained, this could lead to a US equity market correction of at least 15%. US stocks fall and 10-year Treasury yields widen following Powell...