U.S. Fed Finally Comes To Grips With Punishing Inflation Rate

It was a simple, stunning admission. “We have had price stability for a very long time and maybe come to take it for granted,” Jerome Powell, chairman of the Federal Reserve, said last month, The Economist reported.

Photo Insert: Consumer prices rose by 8.5% in March compared with a year earlier, a four-decade high.

Many factors explain the latest burst in inflation, with snarled supply chains, tight job markets, generous fiscal policy, loose monetary policy, and, more recently, the war in Ukraine all part of the fabric.

But one thread runs through them all. Investors, analysts, and, crucially, central bankers believed that high inflation in America had been consigned to history, a problem more for academic studies than for current policy.

No one now doubts that inflation is a problem for today. Consumer prices rose by 8.5% in March compared with a year earlier, a four-decade high. Belatedly, the Fed has swung into action.

As recently as mid-2021 most members of its rate-setting committee believed that it would not raise interest rates at all this year.

At its meeting in March, however, Fed officials concluded that they would raise rates by nearly two percentage points in 2022, setting America up for one of its steepest tightening cycles in a quarter of a century. How did the Fed get it so wrong? And does its sharp shift mean that it is, at last, getting it right?

The Fed’s reply may come later, when the stats show how the tightening could mop up liquidity that drowns the financial system.

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