Fed officials on the defensive as high inflation persists

Fed officials on the defensive as high inflation persists

Federal Reserve Governor Christopher Waller faced an awkward task Friday night: He delivered remarks at a conference packed with leading academic economists titled, suggestively, “How Monetary Policy Got Behind the Curve and How to Recover.”

Fed officials, who set America’s monetary policy, have found themselves on the defensive in Washington, on Wall Street and within the economics profession as inflation hit its fastest pace in 40 years. Friday’s event, at Stanford University’s Hoover Institute, was the clearest expression yet of the growing sense of skepticism around the Fed’s recent policy approach.

The Fed is raising interest rates and raised them on Wednesday in the biggest increase since 2000. But prominent economists on Friday criticized America’s central bankers for being slow to realize that inflation was set to rise significantly in 2021, as that large government spending increased consumer demand. . They criticized the Fed for withdrawing monetary policy support from the economy too hesitantly once it began to react. Some suggested that it was still tentatively moving when more decisive action was warranted.

Mr. Waller defended and explained the decisions the Fed made last year. Many inflation forecasters failed to predict the 2021 price crash, he noted, noting that the Fed pivoted toward removing policy support starting in September, when it became clear that inflation was a problem.

“The Fed was not the only one to underestimate the strength of inflation revealed in late 2021,” said Waller, who expected inflation to be slightly higher than many of his colleagues. He noted that the Fed’s policy-setting committee has had to coalesce around policy moves, which can take time given its size: It has 12 regional presidents and as many as seven governors in Washington.

“This process can lead to more gradual changes in policy, as members have to compromise to reach a consensus,” said Mr. Waller.

Such explanations have done little to protect the Fed so far. Lawrence H. Summers, a former Harvard president and Treasury secretary, suggested on Friday that economic overheating was predictable last year as the government spent so much and “it was reasonable to expect the bathtub to overflow.” Former Fed Governor Kevin Warsh called inflation “a clear and present danger to the American people” and declared the Fed’s reaction “slow.”

And even as the Fed comes under fire for responding too perseveringly as inflationary pressures began to build, a new debate is playing out over how fast and how high rates should be raised to catch up and fight rapid price increases. back under control.

The Fed raised interest rates by half a percentage point this week and forecast more to come. Still, Fed Chairman Jerome H. Powell said officials were not discussing an even larger 0.75-point move, suggesting central bankers still hope to rein in inflation without abruptly halting growth and shocking investors. the economy.

“If supply constraints are quickly resolved, we may only need to take policy to neutral or slightly above it to bring inflation back down,” wrote Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, in a post on Friday. “Neutral” refers to policy settings that neither spur nor slow the economy.

Still, officials have made it clear that if inflation doesn’t start to fade, they will become more aggressive, potentially driving up unemployment and sparking a recession.

“If they don’t ease quickly or if the economy really is in a higher pressure equilibrium, then we will probably have to push long-term real rates into a contractionary stance,” Kashkari wrote on Friday.

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