Misread Signals: 1970s Inflation Bogeyman Isn't Back
The Federal Reserve is facing criticism for its handling of inflation signals. After initially misjudging a supply shock in 2021, the Fed implemented a significant tightening campaign. With current inflation indicators showing rising prices, there are concerns about the potential for overcorrection in monetary policy.
- ▪The Fed misread a supply shock in 2021 as a temporary issue.
- ▪It has since engaged in the steepest tightening campaign since the early 1980s.
- ▪Current inflation indicators show a risk of overcorrection in monetary policy.
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The Fed made its first mistake in 2021. It misread a supply shock as a transitory blip, fell behind, and spent two years engineering the steepest tightening campaign since Paul Volcker's early-1980s crackdown. Now, with April CPI at 3.8%, producer prices up 6.0% year over year, and fed funds futures pricing a meaningful chance of a rate hike before year-end, there is a real risk the institution overcorrects in the opposite direction and makes the second mistake to go with the first. Read Full Article »
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