Christopher Waller, a Federal Reserve governor, faced an uncomfortable task on Friday night: He delivered remarks at a conference packed with leading academic economists titled, suggestively, “How Monetary Policy Got Behind the Curve and How to Get Back.”
Fed officials — who set US monetary policy — have found themselves on the defensive in Washington, on Wall Street and within the economics profession as inflation has run at its fastest rate in 40 years.
The event, at Stanford University’s Hoover Institute, was the clearest expression yet of the growing sense of scepticism around the Fed’s recent policy approach.The Fed is raising interest rates, and lifted them by the largest increment since 2000. But prominent economists on Friday blasted central bankers for being slow to realise that inflation was going to run meaningfully higher in 2021 as big government spending goosed consumer demand.
They criticised the Fed for taking monetary policy support away from the economy too haltingly once it began to react. Some suggested that it was still moving tentatively when more decisive action was warranted.
Waller defended and explained the decisions the Fed made last year. Many inflation forecasters failed to predict the 2021 price burst, he noted, pointing out that the Fed pivoted toward removing policy support starting as early as September, when it became clear that inflation was a problem.
“The Fed was not alone in underestimating the strength of inflation that revealed itself in late 2021’’, said Waller, who expected inflation to be slightly higher than many of his colleagues.
He noted that the Fed’s policy-setting committee had to coalesce around policy moves, which can take time given its size: It has 12 regional presidents and up to seven governors in Washington.
“This process may lead to more gradual changes in policy as members have to compromise in order to reach a consensus’’, Waller said.
Such explanations have done little to shield the Fed so far. Larry Summers, a former Harvard president and Treasury secretary, suggested earlier on Friday that an economic overheating was predictable last year as the government spent heavily and that “it was reasonable to expect that the bathtub would overflow.”
Kevin Warsh, a former Fed governor, called inflation “a clear and present danger to the American people’’, and declared the Fed’s reaction “slow.”
— The New York Times
Oman Observer is now on the WhatsApp channel. Click here
