BILS - How Worrisome Is The Rise In Interest Rates?

• The COVID-19 recession was an exogenous shock, which meant that it could be deep and painful but was unlikely to last very long. This meant that the probability of a deflationary (or disinflationary) recovery was unlikely.
• Credit contractions are inherently deflationary because they stifle balance sheet expansion, which stifles aggregate demand.
• Interest rates are lower than they were in 2010. If inflation continues to rise, then long interest rates will continue to rise and the Fed will become increasingly concerned that they need to raise rates to get ahead of the inflation risk.
• However, while there are many near-term tailwinds for the inflation monster, there are much stronger structural headwinds.

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