Long and variable lags
Economics is not a precise science. Central banks attempt
to influence the economy through monetary policy
(commonly by raising or lowering interest rates).
The Fed uses monetary policy to attempt to achieve its dual
mandate of price stability (low inflation) and full
employment (economic growth).
However, monetary policy affects the economy with “long and
variable lags” – sometimes raising interest rates slows growth
and lowers inflation quickly. Sometimes, it may take years for growth
and inflation to slow. Inflation has fallen from 9.1% last
year to 3.7% in August. This has led many market
participants to believe that the Fed is near the end of its
hiking cycle. So, what are the implications for investors?