Monetary Policy & Inflation | US
Inflation – The Fed’s ‘Unpleasant Arithmetic’
- By Sam van de Schootbrugge
- 8 min read
Summary
- A new NBER working paper by Stanford University’s John Cochrane sets out the ‘unpleasant arithmetic’ facing the Fed in its battle to curb inflation.
- In his view, the Fed’s slow inflation response is not outlandish or incoherent. Rather, it reflects their belief that inflation expectations are anchored.
- Also, raising rates more than currently projected will only lower inflation today at the cost of more inflation tomorrow.
- The only way to reduce inflation is via a coordinated fiscal and monetary response that involves prolonged austerity and higher interest rates.
Introduction
Why is the Fed reacting so slowly to inflation when price stability is its primary mandate? It is unprecedented. Even in the 1970s, the Fed never waited a whole year or let inflation get 8% above the Federal Funds rate. Has it misperceived the scale of the task at hand, just as it failed to forecast the emergence of the highest inflation in 40 years?
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