The Mad Rush of the Fed by Stephen S. Roach

Right now, it’s outdated to warn that the US Federal Reserve is “late” in the fight against inflation. In fact, the Fed is so behind the curve that it can’t even see the curve and may need to apply the political brakes to regain control before it’s too late.

NEW HAVEN — The U.S. Federal Reserve has flip-flopped, an unusual flip-flop for an institution long known for its slow and deliberate changes in monetary policy. Although the Fed’s recent messaging (it hasn’t done anything yet) isn’t as creative as I had hoped, at least it has acknowledged it has a serious problem.

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

But acknowledging the problem is only the first step towards solving it. And solving it will not be easy.

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