In 1974, then-President Gerald Ford pronounced inflation “public enemy number one.” We think it still is. The charts below illustrate the current economic cycle, how it started, where we are now, and where we are likely to go over the next two years. We see full employment, but rampant inflation is forcing the Federal Reserve to focus on stabilizing prices by embarking on a period of quantitative tightening, reducing its purchases of Treasury bonds and Mortgage-Backed securities, and raising short-term interest rates. The eventual result should “Whip Inflation,” slow economic growth and trim risk asset appreciation.

There is a correlation between the $5 trillion growth of the Federal Reserve’s balance sheet (see below) and inflation levels (see above) that we have not seen since the 1970’s. Raising interest rates and shrinking the size of the Fed’s balance sheet, should eventually shrink inflation to an acceptable level.