Did The Federal Reserve Drop The Ball In Its Fight Against Inflation?

As consumers look back on the soaring prices of the past couple of years, it’s only natural to ask which policymakers and institutions deserve blame. And central bankers have been a major factor in the decisions that have been made in an effort to bring the inflation rate down — so that leaves us with an obvious question. Was the Federal Reserve’s decision right or wrong?

Unpacking the Fed’s strategy

Let’s start with what the central bank actually did and why. Generally speaking, the Federal Reserve hikes interest rates in an effort to cool spending, thereby reducing demand and (hopefully) leading to lower inflation.

And in this case, the Federal Reserve did exactly that. But some critics say it was too little, too late.

Interest rate increases began in March 2022, at which time the annual inflation rate was at a higher-than-optimal 5.5% but far lower than its recent peak. At the same time, the unemployment rate was at a historically low 3.6%.

Central bankers had to figure out how much to raise rates so costs would stabilize without triggering widespread job losses.

Damned if you do, damned if you don’t

There’s no question that the inflation rate continued to climb long after the Fed took its initial action, so it’s easy for people to point accusatory fingers at the central bank.

But does that mean interest rates should have started climbing much earlier? The short answer is it’s impossible to say for certain.

Some believe that if the Fed had raised rates a few months earlier, it could have stemmed the tide and inflation would have moderated earlier. Others, however, think any consumer price benefits would have been more than offset by job losses.

The bottom line is that central bankers often find themselves in no-win situations.

Chris Agee September 9th, 2024

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