IT’S WEIRD WHAT HAPPENS WHEN WASHINGTON PRINTS UP FUNNY MONEY BY THE TRILLIONS: Inflation is High, Will Remain Elevated for Years.
The Federal Reserve (Fed) is officially committed to a 2 percent average inflation target, as explained in its Statement on Longer-Run Goals and Monetary Policy Strategy. But supply constraints and a surge in nominal spending have pushed prices well above target. In December, the price level was 3 percentage points higher than it would have been had prices merely grown at 2 percent since January 2020.
The Fed reaffirmed its commitment to a 2 percent average inflation target on January 25, 2022. But, so far, it has done little more than say it would tighten monetary policy in the coming months.
Following last week’s Federal Open Market Committee (FOMC) meeting, the Fed announced it would leave its federal funds rate target and the interest rate it pays on reserve balances unchanged. It will reduce its monthly asset purchases, but the size of the Fed’s balance sheet will continue to grow for now. None of this really amounts to tighter monetary policy, and yet the Fed seems to have convinced markets that it is serious about bringing down inflation.
Inflation isn’t that tough to tame if it is nipped in the bud. But the longer the Fed and Congress put off making the necessary changes to interest rates and spending, the more painful the correction will be.