Where the Fed went wrong
I have a new article at The Hill, which discusses various reasons why the Fed screwed up in the second half of 2021. Here’s an excerpt:
I see at least three reasons for the Fed’s policy mistake.
One was too much focus on closing the so-called “output gap” between actual real GDP and potential GDP, which is exceedingly difficult to estimate. . . .
[second] At a press conference last month, Fed Chair Jerome Powell was asked if the Fed should aim for less than 2 percent inflation after a period of excessively high inflation in order to bring the average back down to the long-term target. Powell forcefully rejected that suggestion, directly contradicting the Fed’s new AIT policy. . . .
The Fed’s sluggish response to economic overheating points to a third reason for its mistake: Officials were frightened by the market’s “taper tantrum” in 2013. As a result, they now prefer to signal policy changes very gradually.
Please read the whole thing.