How Did the Fed Not Anticipate the Inflation Surge?

“As the greatest inflation spike of the last 50 years occurs, the utter failure of economists, their models, and many pundits to foresee what was coming is worth highlighting. Of course, the biggest malfunction in the story was that of the Federal Reserve itself, which had a clear mandate to keep prices stable and seems surprised by their lack of stability.

It’s no understatement to say that the Fed failed to properly anticipate the inflation surge. On Feb. 8, 2021, Raphael Bostic, the president of the Atlanta branch of the Fed, said, “I’m really not expecting us to see a spike in inflation that is very robust in the next 12 months or so.” A few days later, Boston Fed President Eric Rosengren echoed this sentiment, noting that he would be “surprised” to see broad-based inflation sustained at a level of two percent before the end of 2022.

As the saying goes, problems often start at the top. When testifying before the House Financial Services Committee in February 2021, Fed Chair Jerome Powell predicted that it might take more than three years to hit the two percent inflation goal.

Around the summer of 2021, inflation became hard to ignore. Yet Fed officials insisted that it wasn’t yet time to roll back their temporary policies because they weren’t responsible for the rise in prices. The main villain was identified as supply-chain restraints. Once resolved, we were told, inflation would prove to be transitory. Testifying in June of last year before a House subcommittee, Powell said:

“If you look…at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening. That’s something that we’ll go through over a period…then be over. And it should not leave much of a mark on the ongoing inflation process.”

During a speech in Jackson Hole, Wyoming, last August, Powell again echoed this sentiment. He also noted that “longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory.”

But as Hoover Institution economist John Cochrane has been reminding us all along, long-term inflation expectations are notoriously poor predictors of inflation. Sadly, few listened, and team “transitory” was born.”

Fed’s Powell pumped trillions into the economy. Now, he may be the party killer.

“The Fed has penciled in three rate hikes this year, and the first could come as soon as March.”

“Adam Ozimek, chief economist at freelancing platform Upwork, said the Fed misjudged how large the inflation spike would be, though he still thinks — as the Fed previously argued — that price increases will eventually start to cool on their own. He said the danger instead is that the Fed will overreact to levels of inflation that ultimately prove temporary, hurting the millions who still haven’t returned to the labor force.
“Inflation is by any measure extremely high, yet labor slack remains significant as well and we are far from full employment,” he said. “The policy challenge is far more complicated than in 2018, when Powell faced uncertainty about labor slack but without the added pressure of high inflation.”

Still, others have praised the Fed’s restraint amid the price spikes, keeping rates low and allowing the job market to heal more quickly. They argue that inflation is significantly being fed by supply chain issues that the central bank isn’t equipped to solve.

Former Fed Chair William McChesney Martin once said the central bank’s job was “to take away the punch bowl just as the party gets going.” But Sahm argued that a few rate increases don’t have to ruin anything.

“Things are getting better,” she said. “We need to pour a little less punch in the punch bowl.””

Does Modern Monetary Theory (MMT) Destroy National Debt Concerns? SOURCES.

The Real News Podcast – Modern Monetary Theory – A Debate Between Randall Wray and Gerald Epstein The Real News. 2019. https://www.spreaker.com/user/therealnews/the-real-news-podcast-modern-monetary-th Is MMT “America First” Economics? Gerald Epstein. 3 20 2019. Institute for New Economic Thinking. https://www.ineteconomics.org/perspectives/blog/is-mmt-america-first-economics On Modern Monetary Theory