[This piece is in two parts (due to email constraints - if you subscribe you get the post by email), dealing with the sources of the high inflation we’re experiencing. I’ll deal with the monetary policy issues in another piece.] For the impatient, here’s an executive summary of what I’ll discuss in this two-part post, and the policy post to follow: The consensus view on the Federal Open Market Committee (FOMC) is that, if inflation is above (below) target, it is brought down by increasing (decreasing) the target for the overnight nominal interest rate. If we accept that view, then the FOMC made a serious policy error. Inflation has been above the Fed’s 2% inflation target since March 2021, but the FOMC waited a full year to take action in the form of a target interest rate increase. Why did it wait? Because it was overconfident in its ability to understand how the economy works - particularly during an unprecedented pandemic - and overconfident in its ability to forecast future events. That overconfidence led the Committee to commit in 2020 to a policy framework based on a faulty evaluation of post-financial crisis macro history —serving to illustrate why policy commitment can actually be a bad thing.
Part I: High Inflation: Where Did it Come From?
Part I: High Inflation: Where Did it Come…
Part I: High Inflation: Where Did it Come From?
[This piece is in two parts (due to email constraints - if you subscribe you get the post by email), dealing with the sources of the high inflation we’re experiencing. I’ll deal with the monetary policy issues in another piece.] For the impatient, here’s an executive summary of what I’ll discuss in this two-part post, and the policy post to follow: The consensus view on the Federal Open Market Committee (FOMC) is that, if inflation is above (below) target, it is brought down by increasing (decreasing) the target for the overnight nominal interest rate. If we accept that view, then the FOMC made a serious policy error. Inflation has been above the Fed’s 2% inflation target since March 2021, but the FOMC waited a full year to take action in the form of a target interest rate increase. Why did it wait? Because it was overconfident in its ability to understand how the economy works - particularly during an unprecedented pandemic - and overconfident in its ability to forecast future events. That overconfidence led the Committee to commit in 2020 to a policy framework based on a faulty evaluation of post-financial crisis macro history —serving to illustrate why policy commitment can actually be a bad thing.