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Another Annus Horribilis for the Fed

Over the past two years, the US Federal Reserve has repeatedly erred in its analysis, policymaking, communications, and governance. To restore its effectiveness and reduce its vulnerability to undue outside interference, Fed officials must start making up for past mistakes in the new year.

CAMBRIDGE – On the 40th anniversary of her accession to the throne, Queen Elizabeth II remarked that, “1992 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an annus horribilis.” The late monarch’s now-famous speech followed a year of uncomfortable developments for the Crown, including a fire in Windsor Palace, the end of two of her children’s marriages (with a third royal separation to be made public the following month), and various leaks.

The queen’s admirably open and honest acknowledgment of these difficulties helped solidify another three decades of enormous domestic and global respect for the monarchy. As we head into a new year, the US Federal Reserve, seeking to move on from its own second successive annus horribilis, would do well to heed her example. That is the Fed’s best chance to regain policy credibility, restore its reputation, and reduce its vulnerability to undue political interference, all of which will be critical to its effectiveness and, therefore, to economic well-being more broadly.

Over the past two years, the Fed has been proven terribly wrong in its assessment of inflation. Its forecasts have been so far off the mark that some former Fed officials have publicly and repeatedly dismissed them – a highly unusual occurrence. As a result, policymakers squandered the opportunity to move in a timely fashion to contain the price increases that have since eroded everyone’s purchasing power, hitting the most vulnerable segments of society the hardest.