The Fed Is Finding Inflation in All the Wrong Places

December 21, 2021

The Fed Is Finding Inflation in All the Wrong Places Photo

Federal Reserve (Fed) Chair Jay Powell was largely given positive reviews for his performance during last Wednesday’s Federal Open Market Committee press conference. Risk markets also approved, with equities rallying strongly by the conclusion of his remarks. 

Despite mounting criticism that Fed policy has fallen too far behind the curve on inflation, Powell stuck to the Fed’s new script that inflation will decline to its 2% target by the end of next year (but never mentioned the newly retired word, “transitory”). The press conference did, however, contain some revealing questions on the Fed’s new “average inflation targeting framework” and its impact on the current state of the economy. 

One question asked whether intentionally overshooting on the Fed’s 2% inflation target (or seeing “the whites of the eyes on inflation”) played into the recent surge in prices. Powell admitted the “inflation we got was not at all the inflation we were looking for or talking about in the new framework.” The Fed wanted to overshoot on wage inflation but instead saw price increases across a broader range of goods and services while wages failed to keep pace.

The current high-inflation environment and loss of purchasing power has harmed many of the low- and moderate-income workers that the Fed’s new framework on inflation was intended to benefit. The economy’s recent uptick in inflation may represent a case where Fed policymakers should be careful what they wish for. More aggressive monetary tightening may be required to rein in the wrong type of inflation, while labor markets and economic growth face headwinds from the spread of new COVID-19 variants.

Tags: Federal Reserve | FOMC | Inflation | Risk Markets | COVID-19 pandemic | Labor Markets | Economic growth

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