The Fed has a serious problem with inflation

NEW HAVEN, Connecticut : The US Federal Reserve is on a dime, an uncharacteristic about-face for an institution long known for slow and deliberate shifts in monetary policy.

The Fed hasn't really done anything yet, but at least it has recognized that it has a serious problem, at least according to recent messaging from the Fed.

The problem is that of inflation. Like the Fed I worked at under Arthur Burns in the early 1970s, today s policymakers misdiagnosed the initial outbreak. The current surge in inflation is not transitory or to be dismissed as an outgrowth of idiosyncratic COVID 19 related developments.

It is widespread, persistent, and reinforced by wage pressures stemming from an unprecedented tightening of the US labour market. Under these circumstances, the Fed s refusal to change course would have been an epic policy blunder.

Recognising the problem is the first step towards solving it. It won't be easy to solve.

Indicted by the US Consumer Price Index, the inflation rate was 7 per cent in December 2021. With the nominal federal funds rate effectively at zero, that translates into a real funds rate, the preferred metric for assessing the efficacy of monetary policy of - 7 per cent.