Fed officials on the defensive as high inflation persists

Federal Reserve Governor Christopher Waller faced an uncomfortable task Friday night, delivering remarks to a conference packed with prominent academic economists titled, suggestively, “How Monetary Policy Has Fallen Behind and how to go back”.

Fed officials – who set US monetary policy – found themselves on the defensive in Washington, on Wall Street and within the economics profession as inflation hit fever pitch fastest rate 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 on Wednesday raised them by the biggest increase since 2000. But on Friday, leading economists criticized U.S. central bankers for being slow to realize that inflation would rise dramatically. significantly in 2021 as heavy government spending has inflated consumer demand. . They criticized the Fed for withdrawing monetary policy support from the economy too hesitantly once it started to react. Some have suggested it is still moving half-heartedly when more decisive action is warranted.

Mr. Waller defended and explained the decisions made by the Fed last year. Many inflation forecasters failed to predict the price spike in 2021, he noted, pointing out that the Fed turned to removing policy support as early as September, when it became clear that inflation was a problem.

“The Fed wasn’t alone in underestimating the strength of inflation that showed up in late 2021,” Waller said, expecting inflation to be slightly higher than in many of his colleagues. He noted that the Fed’s policy-making committee has had to coalesce around policy moves, which can take time given its size: It has 12 regional chairs and up to seven governors in Washington.

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

Such explanations have done little to protect the Fed so far. Lawrence H. Summers, former Harvard president and Treasury secretary, suggested earlier Friday that economic overheating was to be expected last year as the government spent heavily and that “it was reasonable to expect that the bathtub overflows”. Kevin Warsh, a former Fed governor, called inflation a “clear and present danger to the American people” and said the Fed’s response was “slow”.

And while the Fed is being criticized for overreacting as inflationary pressures began to build, a new debate is evolving about how fast and how big the rates of increases are needed to catch up and rein in rapid price increases.

The Fed rising interest rates half a percentage point this week and expects more to come. Yet Jerome H. Powell, the Fed Chairman, said officials were not discussing an even bigger 0.75 point move – suggesting central bankers are still hoping to control inflation without abruptly stifling growth. and shock the economy.

“If supply constraints dissipate quickly, we may only need to pull policy back to neutral or slightly exceed it to bring inflation down,” said Neel Kashkari, chairman of the Federal Reserve Bank. from Minneapolis. written in a post Friday. “Neutral” refers to the policy framework that does not fuel or slow down the economy.

Yet officials have made it clear that if inflation does not start to subside, they will become more aggressive, which could push up unemployment and trigger a recession.

“If they don’t unwind quickly or the economy is truly in a higher pressure balance, we’ll likely have to push real long-term rates into a tight stance,” Kashkari wrote on Friday.