I was thinking about how a completely subservient central bank can destroy price stability, referring to examples from history. From Phillip Cagan’s U.Chicago dissertation:
Source: CAGAN (1954). Note: Drawn on a log scale.
According to Cagan’s calculations (Table 10), as of August 1920, m/m inflation (annualized) was 30.7% (using log differences). By August 1921, it was 153%; by August 1922, it was 337%.
In other words, one can get rapidly accelerating inflation if monetary policy is completely untethered in a situation where there are massive budget deficits, and the central bank is acting completely at the discretion of the fiscal authority (i.e., what the current assault on the Fed is aiming at).
For FY2026, given the passage of OBBB, the budget deficit will likely be 7% of GDP (compared to 5.5% under the prior current law). This is essentially a structural budget deficit value, given that the economy is near full employment.
