Two Ways Inflation Can Return to Target: Demand Destruction and Credit Events

Inflation can durably return to target through two ways: demand destruction caused by a recession leading to a slowdown in the economy, and credit events where money becomes scarce prompting a reaction from the Fed. The speaker believes that the banking crisis was isolated to a few badly run banks which have since been restructured under strong regulatory oversight. The banking system is viewed as stable despite potential credit risks. The key factor determining a future credit crisis is the weakening of the economy. If the economy weakens significantly, a credit crisis might ensue due to reduced demand leading to job cuts.