Regime 2: The Fed maintains inflation targets

Runaway inflation backfire scenario
The Fed raises real rates to combat inflation and it backfires.
Interest income from the higher rates will enormous as the high real interest rate times the enormous financial wealth being held by households counterproductively overwhelms the economy's productive capacity.
Potential for vicious cycle.
These increases would be accelerated by fears of inflation, introducing the risk of hyperinflation--a panic-driven run on the currency itself. The only available options to contain the process would be: (a) extreme levels of taxation—ideally wealth taxation, which would allow the government to rapidly take the wealth back and (b) price, profit, wage and credit controls across the economy, including controls on financial markets.
Upside Down Market scenario: Stock sell-off
Stock sell-off during inflation is actually the unexpected upside-down market scenario
  1. Competition from higher real interest rates
  1. Corporate profits impaired by higher borrowing costs
  1. Increased labor costs
  1. Higher corporate taxes required to offset gov't severe debt service burden