In a highly anticipated announcement several weeks ago, Federal Reserve Chair Jerome Powell said the Fed would start reversing its pandemic stimulus programs. Removing the training wheels from the U.S. economy will likely begin as soon as November.

The Fed continues to believe that inflation, while painful, is transitory. This Panglossian scenario may turn out to be a pipe dream.

The Fed cut its short-term benchmark rate to near zero when the coronavirus hit in March 2020. The pandemic lockdown and subsequent recession led to ultra-loose monetary policies and massive asset purchases by the central bank aimed at keeping the economy from heading over a cliff.

Powell said the process of dialing back the government’s buying spree, or tapering, from buying $80 billion in Treasuries a month and $40 billion in mortgage-backed securities since June 2020 should be complete by mid-2022. He indicated that interest rates could start to rise again next year but stressed that the reduction of monthly asset purchases is not tantamount to hiking interest rates.

This move comes even though the Fed does not expect inflation, which is running at the highest rate in decades, to persist. The central bank has consistently contended that this year’s surge is transitory and inflation will soon be close to the Fed’s 2 percent target. Transitory has become a byword of pandemic-era central bank policymaking.

In August, overall consumer prices rose 5.3 percent compared to last year, a slightly slower pace than in June and July but high nonetheless. The Fed still sees core inflation, which excludes food and energy prices, running at 3.7 percent this year before falling to 2.3 percent in 2022 and 2.1 percent in each of the following two years.

The Fed is also cutting its economic growth projection for this year to 5.9 percent from a 7 percent growth forecast in June. It projects that unemployment will fall from the current 5.2 percent to 4.8 percent by year’s end.

It merits noting that a 2 percent inflation rate is still a big deal to everyday Americans. If realized, it would result in prices rising by 22 percent over a decade with no assurance that wages would match the increase.

Closely related, inflation makes life more complicated for savers and retirees living on a fixed income, since it erodes the purchasing power of every dollar, which is the equivalent of raising prices. Within living memory, the average price of a cup of coffee was 50 cents. Today it’s around $3.

The Fed appears to believe that relatively high inflation rates are a temporary phenomenon; prices are rising because of the pandemic and the production shortages that accompany it.

Put differently, the Fed anticipates that inflationary pressures such as spiking energy prices and global supply chain bottlenecks will eventually dissipate. It does acknowledge that factors that are contributing to the recent rise in inflation may last longer than originally projected.

Of course, there is no mention that massive monetary and fiscal stimulus over the past year and a half is contributing to inflation. The Fed continues to blame the supply side for inflation without recognizing that monetary policy is pushing the demand side when there is insufficient supply.

But not to worry, the Fed could be correct as it navigates the fog of uncertainty – but it could be wrong. How long is transitory? Will inflation simply go away on its own? One could conclude from the data that the economy has long been overheating and inflation may continue rising for the foreseeable future.

If that is the case, the Fed should snatch away the punch bowl right away. Realistically, it will not increase interest rates to deal with inflation until Americans are angry enough to vote for the opposition party next year. Then they will have to slam on the brakes by raising interest rates aggressively, and the country may well enter a period of stagflation reminiscent of the 1970s.

President Jimmy Carter nominated New York Federal Reserve Bank President Paul Volcker to chair the Federal Reserve Bank in July 1979 to deal with the immediate issue of hyper-inflation. He was confirmed by the Senate in August and served as chair until 1987.

The no-nonsense, independent-minded Volcker oversaw a program of financial austerity that left a deep imprint on the U.S. economy and financial system. Unlike elected officials, he understood that there are times when you must incur short-term costs to achieve long-term benefits. Volcker is widely regarded as one of the best Fed chairpersons in history.

When he took the reins of the central bank, the U.S. was mired in a decade-long period of rapidly rising prices and weak economic growth that had come to be known in the1970s as “stagflation.” The month Volcker took office, unemployment was 6 percent and inflation was barreling towards 15 percent.

One advantage he enjoyed was that the nation was far less in debt than in the current environment. Unlike today, Volcker did not have to be concerned that raising interest rates to fight inflation would risk triggering a debt crisis. Conversely, if the current Fed maintains a loose monetary policy, it risks double-digit inflation.

In a moment market watchers will never forget, Volcker opted to cleave to his monetarist teaching by attempting to control interest rates by contracting the money supply rather than the fed funds rate. The Fed had historically targeted an interest rate in the short-term money market to loosen or tighten the money supply.

Then as now, the Fed set a target for short-term interest rates, then bought and sold securities to ensure that rates actually settled at that level. Volcker concluded that the Fed needed to change strategies and start targeting the actual amount of money floating in the economy. As he said, “it was time to act—to send a convincing message to markets and to the public.”

So just two months after taking office in August 1979, Volcker attacked inflation by using the Fed’s powers to directly target the growth in the quantity of money. He would leave interest rates alone to set themselves freely in the market.

It was shock therapy. By April 1980, interest rates had spiked above 17 percent and in the second quarter of 1980, the gross domestic product contracted by 7.9 percent. The extreme rise in interest rates was called the Volcker Shock.

The action indeed triggered what was then the deepest economic downturn since the Great Depression and drove thousands of businesses and farms to bankruptcy. Unemployment peaked at 10.8 percent.

But by the mid-1980s Volcker’s medicine was working. The reduced money supply and high cost of credit finally vanquished inflation and inflationary expectations.

Volcker’s steadfast commitment to his shock therapy and willingness to take unpopular policy actions made him the target of opprobrium by politicians of all ideological stripes. He believed central bankers needed to steer the economy free of political considerations. Protesting his policies, home builders sent the Fed unused two-by-fours, auto dealers mailed keys to the cars for which there were no buyers, and farmers drove their tractors around the white marble Fed building.

But the double-digit interest rates and sharp double-dip recession that followed the tightening of credit finally slayed the inflation dragon. It plunged below 4 percent in 1983, and by 1986 it was down to around 2 percent.

Interest rates eventually followed. Once the out-of-control inflation ended, he cut rates. This restored faith in the dollar, the Coca Cola of money, and laid the groundwork for a quarter century of low inflation, steady growth, and rare and mild recessions.

It can be said of Volcker as Hamlet said of his father: “He was a man, take him for all in all. I shall not look upon his like again.”

The COVID-19 pandemic continues to wreak havoc across the globe, disrupting the globalized and interconnected world. With the vaccine rollout, some regions are finally getting a handle on both the disease and the economy.

Many world leaders believe globalization was in retreat even before the pandemic. They argue that to prepare for the post-COVID-19 era, new energy must be infused into global governance through multilateral actions.

Finding common solutions to the challenges of climate change, transitioning to clean energy, terrorism, cyber security, and emerging technologies will require much more global governance than the international community has been able to muster.

Governance advocates point to the July 1 agreement by 131 countries to establish a minimum tax rate of at least 15 percent for multinational corporations as an historic step in the right direction and that globalization of governance is becoming a reality.

Globalization is not a new concept. At some level, trade across national borders has been an important determinant of the wealth of individuals, companies, and countries throughout history. The search for trading opportunities and trade routes was a primary motivation for exploring much of the world.

The roots of today’s globalized world were put down at the end of the Second World War.  The allied nations created a rules-based system for international commerce and finance that allowed products, science, and technology to move across borders in an effort to lay the foundation for lasting peace.

In the 1990s, the world entered an era of hyper globalization, becoming more interconnected than ever before. In this era, the big new player on the scene was China, which joined the World Trade Organization in 2001. Along with the U.S., it grew to dominate global trade.

Many still question the benefits of globalization. They argue that interconnection and dependency between nations made economic and public health crises even worse for many countries.

While the globalization of governance may placate some, it hardly offers comfort to those who have lost good jobs and experienced the pain of economic globalization. For them, globalization is just another name for globaloney, although many support the concept with their wallets by shopping at firms who source their products from Chinese suppliers such as Walmart.

Others argue that the benefits of globalization are not distributed equitably. For example, many who oppose globalization of the US. economy do so on the basis that firms make manufacturing, marketing, and other strategic choices in ways that maximize profits for shareholders, often to the detriment of a firm’s other stakeholders, such as employees and the communities in which they do business.

American manufacturing has suffered severe disruption or outright collapse as a result of increased foreign competition and the outsourcing of manufacturing to countries where labor is cheaper. Globalization has become a polarizing issue in the U.S., with entire industries moving overseas and the resulting economic squeeze on the middle class.

Others believe the COVID-19 pandemic has exposed developed countries’ excessive dependence on Chinese manufacturing.  They believe that after the pandemic, countries like the U.S. must take action to gradually reduce their dependence upon China’s low-cost global supply chain.

Countries will look to build some duplication and flexibility into their global supply chains to guard against putting themselves into adverse bargaining positions.  Such actions may well push China-U.S. relations even further towards confrontation.

Even before the pandemic arrived, globalization had taken two big hits. The first was the 2008 financial crisis, when cross border investments, trade, and supply chains all contracted.

Second, a wave of populist leaders were elected across the globe, championing economic nationalism and attacking the existing global economy. Free trade went out of fashion and a trade war broke out between China and the U.S.

While the post-COVID world will not see a complete unwinding of globalization, it is likely to be more fractured and regionalized. The basic challenge will be reconciling a deglobalized world with the need for collective action to address global issues.

It’s a mug’s game to be forecasting inflation, but it’s starting to look like the Federal Reserve may have to tighten monetary policy sooner rather than later to get it under control.

Last week, the May core personal consumption expenditure price index rose 3.4 percent from a year ago, the fastest increase since April 1992. This is the key inflation indicator the Fed uses to set policy.

Though the reading could add to inflation concerns, Fed leaders, backed by an army of economists armed with models and data sets, insist the current situation will subside as economic conditions return to normal.

They continue to argue that inflation has spiked recently because of supply chain disruptions that have left manufacturers unable to keep up with the escalating demand that has accompanied economic reopening. Soaring real estate prices also have played a role, along with the natural bounce back after plummeting demand depressed prices last year.

Economist Friedrich von Hayek once likened controlling inflation to trying to catch a tiger by its tail: an impossible task with unpleasant consequences for the economy and for personal finances. Judging by the most recent inflation reading, the cat may be already out of the bag.

As William McChesney Martin, the Fed chair from 1951 to 1970, said in a 1955 speech, the job of a central banker is to “remove the punch bowl” before the party gets out of control.

This metaphor referred to a central bank’s action to stop flooding the country with easy money and ultra-low interest rates. There is no silver bullet, magic wand, or get-out-of-jail-free card when dealing with inflation.

The federal funds rate is the most important benchmark for interest rates in the U.S. economy and it also influences interest rates throughout the global economy. Raising it may impact several key economic players.

Banks will be copacetic with higher interest rates. They will see an increase in their net interest margins, an important measure of banks’ profitability. Net interest revenue refers to the difference between interest earned on loans and interest paid on deposits. They will charge more interest for their loans, while deposit rates increase more gradually.

Life insurance companies will also welcome higher interest rates. Most insurers earn substantial income from investing premiums and favor high quality bonds whose yields have plummeted in recent years in the sustained low interest rate environment.

Rising interest rates negatively impact the stock market because higher rates make it more expensive for companies to operate and borrow money. That reduces profitability, which in turn hurts the value of company stock. Also, when stocks decline, investors may move into bonds to take advantage of the higher interest rates.

Bonds are particularly sensitive to interest rate changes. When the Fed increases rates, the market price of existing bonds declines. New bonds come into the market offering investors higher interest rates, which causes existing bonds with lower coupon payments to become less valuable.

While higher interest rates are bad for borrowers, they’re great for folks with savings accounts, certificates of deposit, and money market mutual fund accounts who currently earn a hair above nothing on these accounts. Conversely, a hike in interest rates adversely impacts consumer credit such as student, auto and personal loans, lines of credit and credit cards.

As for the housing market, rising mortgage rates will hurt home prices, since higher interest rates may force borrowers to buy a cheaper house to maintain the same monthly payment. Higher mortgage rates may have the biggest impact on the lower end of the housing market.

Stepping back from the immediate issue of inflation or deflation, it is useful to recall that a consensus of British economists predicted that Margaret Thatcher’s economic policies would be disastrous. As her first chancellor of the exchequer, Geoffrey Howe, said, “an economist is a man who knows 364 ways of making love, but doesn’t know any women.”

Bad news on the inflation front: over the past 12 months, the Labor Department said that the U.S. Consumer Price Index (CPI) rose by 5 percent from a year earlier, the biggest increase since August 2008.

The Federal Reserve (Fed) uses a different index to measure inflation, the Personal Consumption Expenditure. This index, which ignores the often volatile categories of food and energy, jumped 3.8 percent in May from the year before, the largest increase for that reading since June 1992.

Last August, the Fed adopted a historic shift to interest rate policy that places more emphasis on boosting employment, allowing inflation to rise above their 2 percent target and keeping rates lower for a longer period. The Fed said it believed that this inflation target is most consistent over the long run with meeting its challenging goals of maximum employment and stable prices, often called the dual mandate.

Now, with inflation on the rise, the critical question is whether higher than expected price increases are just because of the economy reopening or if they’re being caused by something more persistent.

Government policymakers and economists argue that it’s the former.  They claim some of the surge can be explained by a low base — prices fell dramatically last spring as consumers spent less in the face of the pandemic.  Most Americans spent last May quarantined in their homes, rather than shopping or taking a holiday, so the price of goods and services were quite low.

The Fed argues that the recent increase in inflation has been fueled by an unusual combination of short-term supply bottlenecks and pent-up demand from consumers finally emerging from their homes. Demand is also being driven by Americans who are flush with cash after multiple stimulus checks.

That said, it may be that COVID’s impact on global supply chains and production will prove more durable than anticipated and render inflation less transitory than the Fed expects. For example, the Federal Reserve Bank of Atlanta’s sticky price index, a weighted basket of items that change price relatively slowly, increased 4.5 percent in May, the largest increase since April 2009.

Also, labor scarcity is reversing decades of wage stagnation. Thanks in part to some people choosing not to look for work after Congress’s extension of an extra $300 a week in unemployment benefits until September, demand for workers is outstripping the supply, enabling workers to secure higher wages. The Fed argues that the strong labor market prior to the pandemic did not trigger a significant rise in inflation.

Inflation, defined as a general rise in the level of prices, is insidious. It erodes purchasing power over time if wages don’t keep up.  Even at an annual inflation rate of 2 percent, the purchasing power of $10,000 put under your mattress today is about $8,200 in 10 years.

By allowing inflation to rise above 2 percent, the Fed wanted to avoid inflation’s evil twin: deflation, or a sustained decline in the general price level.

Why does the Fed want to avoid falling prices? For starters, if consumers come to expect prices to decline in the future, they may delay purchases for as long as possible. Consequently, sales volume fall, corporate profits decline, unemployment rises, and the economy grows more slowly, causing prices to decline further.

There is a trade-off between price stability and maximum employment, and each scenario has winners and losers.  The intellectual heavy hitters at the Fed will surely wait for additional data before deciding whether to sacrifice full employment on the altar of price stability.  Of course, they might also face political pressure not to raise interest rates because, in an era of soaring debt and deficits, higher rates would increase government costs.

Such are the consequences in the Fed’s high-stakes game of determining whether rising inflation is a passing phase or a more permanent problem.

Capital markets are signaling increasing concerns about inflation as the economy recovers from the great virus crisis. Many experts are concerned that further cost-of-living increases will result as consumer demand outstrips supply.

On the other hand, the Federal Reserve believes inflation pressures caused from a near-term imbalance between demand and supply is transitory. But history teaches that inflation fears must be addressed early to avoid serious economic pain.

As the economy re-opens, the danger is that the US will experience a classic case of too much money chasing too few goods. There has been rampant money printing, and money that has been sitting in people’s bank accounts can now finally be spent.

Supply has been restricted by furloughs, mask wearing, social distancing and other policies to contain the pandemic. The Fed’s position is that recent increases in the prices of food, construction materials, used cars and gasoline, along with scattered labor shortages and surging home prices, will quickly fade post-pandemic.

But the Fed flooding the economy with massive amounts of liquidity may set the stage for a possible surge in price levels, stoking inflation. These fears are grounded in the 1970s, when the US underwent a period of double-digit inflation that led to painful memories for Americans who experienced the so-called Great Inflation.

During that time, inflation soared from a negligible 1.6 percent in 1965 to 13.5 percent in 1980. Stable prices provide people with a sense of security. They are like safe streets and clean drinking water. During the Great Inflation, people couldn’t predict whether their wages would keep pace with large price increases that had become the norm.

Inflation was blamed on such factors as President Nixon suspending the convertibility of the dollar into gold, which caused the value of the dollar to drop and triggered higher import prices; two oil price shocks; the massive cost of the Vietnam War; monetary policy mistakes; and the breakup of the Beatles.

People began to expect continuous price increases, so they bought more goods. Increased demand pushed up prices, leading to demands for higher wages, which triggered even higher prices, leading to a continuing upward spiral.

For example, labor contracts increasingly included automatic cost-of-living clauses that contributed to the inflationary wage-price spiral, and the government began to peg some payments, such as Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices may have helped workers and retirees cope with inflation, they also perpetuated it.

Government’s ever-rising need for revenue increased the federal budget deficit and led to more government borrowing, which in turn pushed up interest rates and further increased costs for businesses and consumers.  With energy costs and interest rates high, business investment languished and unemployment exceeded 10 percent.  The simultaneous inflation and recession that followed wrecked many businesses and hurt countless Americans.

The Fed took drastic steps in the late 1970s and early 1980s, tightening monetary policy under legendary Chairman Paul Volcker to promote price stability and combat the persistent surge in inflation. Consequently, the federal funds rate soared from 10 percent at the start of 1979 to 19 percent by the middle of 1981. The unemployment rate peaked at 10.8 percent in late 1982.

During this severe recession, thousands of businesses failed because they did not have access to capital, and credit-dependent sectors of the economy, such as home and car sales, suffered dramatically. Volcker’s tight money policy was a tough pill to swallow, but it eventually had the desired effect. By the mid-1980s, inflation dipped below 5 percent.

The history of the Great Inflation holds important lessons for the future. One is that rising prices should be nipped in the bud, because there is no quick and painless fix for rampant inflation. The longer you wait to deal with it, the harder it becomes.

As the economist and philosopher Friedrich Hayek put it, “Taming inflation is like catching a tiger by the tail.”

Identifying an asset bubble is not easy. They are only obvious after the bubble has burst – time alone gives definition. Americans may soon get another lesson in asset bubbles. The threat of rising inflation could burst any number of them.

One working definition of a bubble is when an asset’s market price far exceeds its fundamental value and is not justified by estimated price earnings. Artificially high asset valuations that are based on misconceptions that distort reality.

There is certainly disagreement about what is the correct measure of price earnings and one can only estimate fundamental value. Even if the diagnosis is correct, you don’t know when the bubble will burst.

Put simply, bubbles are booms that went bust, followed by a crash – a rapid decline in market prices. After all, that is what bubbles are supposed to do.

Bubbles make for interesting stories. Charles MacKay’s classic book, “Memoires of Extraordinary Popular Delusions and the Madness of Crowds,” was first published in 1852 and is still in print. Fabled asset bubbles are the Dutch tulip bubble of the 1630s, the South Sea and Mississippi bubbles of 1720, the run-up in American stock prices in the 1920s, the dot-com bubble of the late 1990s, and the housing bubble of the mid-2000s, when U.S. housing prices were 50 percent above their long-term trend.

Today there may be asset bubbles in specific markets, such as housing, cryptocurrencies, and stocks. U.S. housing prices rose more than 10 percent last year. The housing market is booming for one key reason: low interest rates. Prices for cryptocurrencies, an asset that doesn’t produce cash flows, rose more than 500 percent in the last year. This surge in the price of unregulated cryptocurrencies such as Bitcoin and Dogecoin has attracted the attention of many investors.

Then there is the incredible explosion in Special Purpose Acquisition Companies (SPACs). This is a company that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company. Also, known as “blank check companies,” SPACs have been around for decades. But new issuance of SPACs has skyrocketed over the past year. Over $75 billion was issued in 2020. Less than three months into this year, they have raised more than $78 billion.

The U.S. stock market ended 2020, another year that will live in infamy, at record highs. After bottoming out during the initial COVID-19 lockdown in March, the S&P 500 rose 68 percent in 2020, finishing the year up more than 16 percent, shattering all-time records along the way. The Dow Jones Industrial Average and the tech-heavy Nasdaq gained 7.25 percent and 43.6 percent respectively, despite the public health and economic crises.

One condition that typically accompanies asset bubbles is easy credit that turbocharges speculation and benefits borrowers.

Federal Reserve Chairman Jerome Powell is continuing the massive expansion of money and credit. Americans hope these policies don’t make a monkey out of Darwin.

Powell recently said the Fed won’t raise rates until they see a 3.5 percent unemployment rate and inflation averaging better than 2 percent. Inflation in not high on the Fed’s list of worries. Their top concern is mending the labor market. Both the Fed and the Biden administration are focused on getting the 10 million unemployed back on payrolls.

The bond market appears skeptical about letting inflation rise as 10-year bond rates are increasing – a signal from investors that they expect higher inflation. The bond market is apparently concerned that inflation would cut into buying power and force the Fed into rate hikes that could pop some of these asset bubbles that inflated thanks to rock-bottom interest rates, creating big risks to the economy.

To strike an optimistic note, if faintly, the accelerating rollout of COVID-19 vaccines has set the stage for rapid economic recovery in the second half of this year, hopefully with limited inflation. So, place you bets accordingly.