If everything was going to plan, non-standard monetary policy at the zero lower bound (QE) would have raised inflation expectations increasing the level of aggregate demand as businesses and consumers ramped up their activities in anticipation of higher costs. The more this “overheating” goes on, the more forceful it becomes. Eventually, by virtue of the Phillips Curve, aggregate demand is so strong for so long that any slack in the labor market is absorbed leaving businesses to energetically compete for workers.

At that point, companies have no choice but to pay more for marginal labor which then leads them to pass along those costs to consumers in the form of higher prices. Consumers, as workers, are getting paid more so they absorb those higher costs but in turn raise their own pay expectations. These then feed back through the labor market in the form of spiraling wage demands, which companies pass back to workers, and so on.

The net result: 1978. This has become the obsession for central bankers. They have decided that the worst case is repeating the Great Inflation, and largely because they’ve decided repeating the Great Depression, in kind, isn’t possible. Their primary fear is not without good reason, at least in their own self-interest. The last time the world was joined together in its righteous anger over Economists’ incompetence was at the tail end of the seventies.

They always fight the last battle, never look ahead to the next one.

But since they’ve also banished any study of money within their statistics-based discipline, how will they know in which part of the process the current economy resides? And if there are questions about that, how can they possibly know what comes next?

This is the world Jay Powell has inherited from Janet Yellen, who in turn had inherited the same ambiguousness from Ben Bernanke. If they were sure that they had made aggregate demand sufficient, enough to have absorbed any lingering slack leftover by the Great “Recession” an embarrassing ten years ago, they wouldn’t be “raising rates” a little here and there, just a few hikes each year.