The Fed’s Mad Scramble

NEW HAVEN – The US Federal Reserve has turned on a dime, an uncharacteristic about-face for an institution long noted for slow and deliberate shifts in monetary policy. While the Fed’s recent messaging (it hasn’t really done anything yet) is not as creative as I had hoped, at least it has recognized that it has a serious problem.

That problem, of course, is inflation. Like the Fed I worked at in the early 1970s under Arthur Burns, today’s policymakers once again misdiagnosed the initial outbreak. The current upsurge in inflation is not transitory or to be dismissed as an outgrowth of idiosyncratic COVID-19-related developments. It is widespread, persistent, and reinforced by wage pressures stemming from an unprecedentedly sharp tightening of the US labor market. Under these circumstances, the Fed’s continued refusal to change course would have been an epic policy blunder.

But recognizing the problem is only the first step toward solving it. And solving it will not be easy.

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