The Fed may be wondering why it has been so slow on inflation
Central bankers are asking if they should have reacted faster to rising inflation last year – and they have been learning from the recent past.
Some Federal Reserve officials are beginning to acknowledge that they have been slow to respond to rapid inflation over the past year, a delay that is now forcing them to hit the economy abruptly – and may teach lessons for the way forward.
Inflation accelerated last spring, but Fed policymakers and most private-sector forecasters initially feared that price gains would fall sharply. It became clear in the early fall that rapid inflation was proving to be more enduring – but the Fed quickly removed policy support only in late November and did not raise rates until March.
Many current and former Fed officials have suggested in recent days that the central bank should have reacted more quickly and forcefully to the recent collapse, but this has been offset by deep uncertainty about the future and the Fed’s approach to policy-making.
Officials had spent years battling cold inflation, which made some hesitant to believe that rapidly rising prices would survive. Although they were more concerned, it took time to reach an agreement on how to respond to the Fed’s large group of policymakers. Another complication was that the Fed had given clear assurances to the markets on how to remove support for the economy, making it more difficult to adjust quickly.
Randall K, vice president of the Fed for oversight in 2021. Quarles told a conference last week, “It’s a complicated situation with few examples – people make mistakes.
Mr Quarles, who left the Fed at the end of the year, argued that support should have begun to withdraw aggressively after September. However, he added that the rate hike that central bankers are now doing could still determine the situation.
However, delays can come with consequences. The Fed stopped buying securities altogether and began raising rates in March, when prices rose 8.5 percent from a year earlier, the fastest rate since 1981. Consumer price growth is expected to accelerate when new data is released on Wednesday.
And with higher prices lingering, inflation expectations have risen, threatening to change domestic and business behavior in a way that will perpetuate the problem.
As inflation eats up salaries and makes it harder for families to afford groceries and cars, it has emerged as a major political issue for President Biden, whose economic ratings have fallen due to concerns over the handling of the economy. During remarks at the White House on Tuesday, Mr. Biden called inflation “the highest domestic priority” and said his administration was taking steps to curb it. He also tried to push back the Republicans, who have spent months blaming him for the rise in inflation, whose policy ideas are “extreme” and will hurt working families.
“I want every American to know that I am taking inflation very seriously,” Biden said, adding that the Fed has a “primary role” to play in controlling inflation.
The Fed is now rapidly raising rates to bring the situation under control. Officials raised debt spending by half a percentage point this month, their biggest increase since 2000, with two more major adjustments to come as the broadcasts unfold. They will also begin reducing their 9 trillion bond holdings next month.
If the Fed continues to adjust its policy this year, trying to catch up, policymakers risk hitting the brakes on a fast-growing economy. Such drastic stops can hurt, increase unemployment and possibly lead to a recession. Officials especially prefer to implement their policy breaks gradually, which increases the likelihood that the economy will slow down painlessly.
However, many Fed officials point out that it is easy to predict what the Fed should do in 2021 – at the moment, it is difficult to know whether the price increase will last. Inflation was initially driven by some of the larger supply-side products, such as semiconductors and car chains. Only later in the year did it become clear that price pressures in the food, rent and other sectors had increased.
“I try to do some favors and say: in a very precarious period, with an unprecedented setting, when there is no real model to guide us, people will do the best they can,” Federal Reserve Chairman Raphael Bostic told the Bank of Atlanta in an interview Monday. Mr Bostic was one of the first to suggest that the Fed should stop buying bonds and consider raising interest rates.