John Cocharne: maybe interest rates don't have to be above inflation after all
In this view, a shock to inflation will eventually fade away even if the Fed does nothing. The Fed can help by raising interest rates, but it does not have to exceed inflation. (That is, so long as there is no new shock, like another fiscal blowout.) This view comes from rational expectations. That term has a bad connotation. It only means that people think broadly about the future, and are no worse than, say, Fed economists, at forecasting inflation. Story: If you drive looking in the rear view mirror (expected road = past road), you veer off the road, unstable. If you look forward, even badly, (expected road = future road), the car will eventually get back on the road.