Börskollen | Column: "All talk, no action"

In this column for Börskollen, Eric Strand, portfolio manager at AuAg Funds, sets out why a central bank is better read by its actions than by its forecasts. Two per cent inflation has been promised for decades and almost never delivered, and no forecast path has yet proved right. What the Fed does is plainer: after an attempt to shrink its balance sheet it is expanding again, with the money supply growing alongside it.

Valuable Insights:

• Inflation is measured against last year's prices, so 2 per cent after a year of 20 per cent adds a little more on top of prices already a fifth higher – the target slows the climb rather than reversing it.
• New money affects prices only if it is actually spent: velocity (how often money changes hands) fell steadily from 2000, so two decades of money creation lay still without showing up in consumer prices. Since 2021 velocity has risen, and once that accumulated money moves it shows up in both consumer and asset prices.
• Higher rates work on demand, so where prices are rising because costs are rising they mostly slow the economy without touching the cause – and an administration carrying 40 trillion dollars of debt, at deficits of around six per cent, needs growth and lower long-term borrowing rates rather than a slower economy.