At their November 2021 meeting, Fed policymakers should have changed its forward-guidance language to suggest that it anticipated raising interest rates soon. “Being patient throughout most of last year given the developments that were hitting the economy at the time, the supply shocks and the shifts in demand from services to goods are both things that, I think, make sense to allow to at least temporarily raise inflation above the target.” But, he added, the Fed waited too long to pivot to a less accommodative stance. Steinsson said that Fed policy during 2021 “given what they knew at the time” was sensible. “When I was taught economics, I was taught that the reason you have independent central banks is to avoid a situation where short-sighted politicians….push as hard as they can on the employment side of their mandates….It’s not all clear to me how pushing as hard as you can on employment while pointing to inflation expectations being anchored as the justification is all that different from the inflation-bias scenario that the textbooks warn about.” “What the Fed said last year was, in effect, we’re not that worried about inflation because inflation expectations are anchored so we, therefore, think inflation will be transitory,” and thus monetary policy can focus on the other half of the Fed’s mandate, maximum employment. Incoming data, particularly wage growth, are inconsistent with the Fed’s 2 percent inflation target. (You can also watch a video of the conversation, moderated by the Hutchins Center’s Louise Sheiner.) Is the Fed behind the curve? The Hutchins Center put those questions and others to three experts on monetary policy at a March 2, 2022, event: Henry Curr, economics editor of The Economist Jon Steinsson, Chancellor’s Professor of Economics at the University of California, Berkeley, and co-director of the National Bureau of Economics Research’s monetary economics program and Joseph Gagnon, a senior fellow at the Peterson Institute for International Economic and a former senior Fed staffer. Did the Federal Reserve wait too long to raise interest rates to restrain inflation? Is the Fed’s new monetary policy framework working out as the Fed hoped it would? What are the biggest monetary policy challenges that the Fed faces in the next couple of years?
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