Is the Federal Reserve reviewing the link between high inflation and US monetary policy of the past two years? A reporter asked Fed Chairman Jerome Powell this question at a June 15 news conference. After acknowledging that the Fed was doing so “very carefully”, the chairman turned his attention away. He said inflation was “dominated by deflationary forces” for decades, but recent history has been plagued by “extraordinary setbacks”. Pointing to the pandemic, the war in Ukraine and the shutdown in China, he concluded: “We know that a different set of forces is driving the economy.”
Yet Mr. Powell neglected to mention the expansionary monetary and fiscal policies of 2020 and 2021, which certainly contributed to increasing pressure on prices. More important, he missed the main culprit: the Federal Reserve. The Fed lost control of inflation by abandoning its decades-old strategy of pre-emptive restraint – that is, tightening inflation before it took hold. That policy, promoted by Fed Chairman Paul Volcker in the 1980s, has provided price stability for nearly 40 years.
opinion | Volcker, Powell and the price of amnesia about monetary policy
Is the Federal Reserve reviewing the link between high inflation and US monetary policy of the past two years? A reporter asked Fed Chairman Jerome Powell this question at a June 15 news conference. After acknowledging that the Fed was doing so “very carefully”, the chairman turned his attention away. He said inflation was “dominated by deflationary forces” for decades, but recent history has been plagued by “extraordinary setbacks”. Pointing to the pandemic, the war in Ukraine and the shutdown in China, he concluded: “We know that a different set of forces is driving the economy.”
Yet Mr. Powell neglected to mention the expansionary monetary and fiscal policies of 2020 and 2021, which certainly contributed to increasing pressure on prices. More important, he missed the main culprit: the Federal Reserve. The Fed lost control of inflation by abandoning its decades-old strategy of pre-emptive restraint – that is, tightening inflation before it took hold. That policy, promoted by Fed Chairman Paul Volcker in the 1980s, has provided price stability for nearly 40 years.