I don't expect this administration to do anything to dampen inflation. Our best hope for some relief is for the House of Representatives and the state and local governments to reduce spending and begin dealing with this excessive public sector debt. On the federal level, I suspect we'll hang on for a wild ride and work hard to elect fiscal conservatives. A fiscally conservative administration may well push up interest rates a la Volker. Of course, investors (e.g. China) may not be content with current low interest rates, given rising inflation and continued deficit spending by the US. If investors demand higher interest rates, what then? Borrow more from China to pay for it? We're over our heads in red ink at these interest rates. How are we going to deal with higher rates? Difficult questions.
Two things. First the Fed is nominally an independent entity, acting without regard to pressure from any Administration, fiscally conservative or no.
Second, the Fed, while it can control short term rates, has very little control over long term rates, which are set by auction.
This is where the "Bond Vigilantes" come in. If they lose confidence in the Government's ability to repay its debts, or if they suspect that inflation will eat up their returns, they will demand a higher rate, and withhold their bids at auction.
At our current level of debt, any increase in the cost of borrowing could be disastrous. Interest on the debt will begin to crowd out all other items in the budget.
Borrowing from China, or anyone for that matter, does nothing to help us, unless they decide to do us the favor of giving us a cut rate deal (bailout). Like Greece, however, we can expect them to dictate drastic cuts in spending, on their terms, not ours.
If inflation continues to rise, the Fed will be forced to turn around its "free money" policy and raise interest rates to combat it.
The Government will be forced to cut spending for everything but the interest on the debt, and bring it down to sustainable levels.
Otherwise the game is over for us.