Going forward, the question is not only whether inflation will fall in the coming months, but also how far it will fall and if it will fall soon enough to avoid spurring a concerning rise in longer-term inflation expectations. I agree with my FOMC colleagues and most private forecasters that inflation likely will decline considerably next year from its currently very elevated rate.
Given their long investment horizons, they are well suited to holding a portion of their funds in less-liquid assets to earn a liquidity premium. As long as the liquidity, market and credit risks associated with these investments are prudently managed, this is a positive development.11 A second challenge is longevity.