Like recession, periods of high growth are also self-reinforcing due to EXPECTATIONS. This time inflation expectations, in the US were that it would subside soon, therefore people did not cut spending. The memory of the last decade's lower than 2% inflation reinforced those expectations.
If we know the expectations
we could avert a negative outcome or even reinforce a positive outcome by the
way of some economic stimuli.
This time people believed that inflation would come back soon so they did not cut spending and it did not cut the supply by lowering employment which kept reinforcing lower price expectations.
Prices are the oldest most reliable indicator of recessions and low prices could soon turn into a full-fledged recession, and the Fed thinks that may help avert a recession by cutting the interest rates.
Nonetheless, price expectations could help manage demand, supply growth, and expectations. It is a dichotomy that high price expectations are managed by high interest and lower price expectations by lower interest rates due to stress on the demand side and could reinforce expectations.
However, from a supply-side perspective, high price expectations must be dealt with by lowering interest rates and lowering price expectations by increasing interest rates, which could diminish expectations by affecting the productivity of capital, demand, supply, and growth.
The work of central banks is to reinforce positive expectations and diminish negative expectations though it is a time consistency problem since at times it wants high inflation and sometimes low inflation because prices are variable.
Nevertheless, it is a long debate whether we are managing demand or supply, but both are intertwined. During low growth, demand, supply, and price expectations we cut interest rates and during high growth, demand, supply, and price expectations we hike which could be self-fulfilling and could be avoided by maintaining stability in the interest rates.
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