Now that the US midterm election is over, markets and the financial press are returning to a more dovish outlook and concluding that major sources of inflationary pressure were transitory after all. But it may not last, because monetary policy appears to have been following politics more closely than its practitioners want to admit.
Headlines about high inflation continue to feed into commentaries demanding that the US Federal Reserve increase interest rates to curtail demand. It is not even the best way to contain rising prices.
The Fed has now acted, raising interest rates by half a percentage point. That is the largest incremental increase in 22 years, though it is not, by itself, an economic earthquake.
