Inflation in the United States began accelerating in early 2021 as the economy emerged from the COVID-19 pandemic, rising from an annual rate of 1.2 percent in December 2020 to a 40-year high of 9.1 percent in June 2022.
The Fed didn’t act to rein in inflation by raising interest rates until March 2022, when Fed Chair Jerome Powell repeatedly insisted that inflation was “temporary,” suggesting it could be easily tamed.
“The Fed thought the source of the inflation that started in the post-pandemic era was excess demand, and you can understand why they might have thought that…if they didn’t do their homework,” Stiglitz said during the Ambrosetti Forum.
But the economist explained that the price hike was often driven by other factors, such as a shortage of key components, including semiconductor chips.
In an effort to rein in inflation back toward its 2% target, the Fed has now raised interest rates 11 times in all, to a target range of 5.25% to 5.5%, the highest level in more than 22 years.
Significant progress has been made, with the 12-month headline CPI (inflation) reading falling to just 3.2% y/y in July, and multiple data points suggesting that inflationary pressures have eased considerably.
Stiglitz is unlikely to lead the tightening of monetary policy during the past eighteen months to push the US economy towards recession, but he indicated that there are lessons that can be learned from the Federal Reserve’s assessment of inflationary dynamics.
“Why was there inflation? We all know why,” he said. “At the beginning, car prices went up so high – why? Was it because we didn’t know how to make cars? No, we knew how to make cars. But American auto companies forgot to introduce Applications for chips, and without chips, you can’t make a car.”
#Nobel #laureate #explains.. #Fed #wrong