Though US inflation now seems to have cooled, the Federal Reserve’s slow start likely resulted in sharper interest-rate hikes than would otherwise have been needed to rein in price growth. Is the Bank of Japan making the same mistake?
TOKYO – In the fall of 2021, monetary economists in the United States were sharply divided between those who believed that high inflation would be short-lived (Team Transitory) and those who insisted it was here to stay (Team Persistent). Today, a similar clash can be seen in Japan, though there are very different considerations at play.
America’s Team Transitory based its stance on the benign inflation projections that were being shared among members of the Federal Open Market Committee. As recently as December 2021, projected personal consumption expenditure inflation – the US Federal Reserve’s preferred measure – for 2022 was just 2.6%. Such figures, Team Transitory concluded, called for a slow, gradual increase in the policy rate over 2022.
Team Persistent, however, warned that this would not be enough to curb US inflation, and urged the Fed to undertake sharp increases in the policy rate – starting immediately. The Fed ultimately embraced this recommendation, hiking the policy rate seven times in 2022, for a cumulative increase of 4.25 percentage points. But it did so only after inflation proved to be much higher than Team Transitory’s projections.
TOKYO – In the fall of 2021, monetary economists in the United States were sharply divided between those who believed that high inflation would be short-lived (Team Transitory) and those who insisted it was here to stay (Team Persistent). Today, a similar clash can be seen in Japan, though there are very different considerations at play.
America’s Team Transitory based its stance on the benign inflation projections that were being shared among members of the Federal Open Market Committee. As recently as December 2021, projected personal consumption expenditure inflation – the US Federal Reserve’s preferred measure – for 2022 was just 2.6%. Such figures, Team Transitory concluded, called for a slow, gradual increase in the policy rate over 2022.
Team Persistent, however, warned that this would not be enough to curb US inflation, and urged the Fed to undertake sharp increases in the policy rate – starting immediately. The Fed ultimately embraced this recommendation, hiking the policy rate seven times in 2022, for a cumulative increase of 4.25 percentage points. But it did so only after inflation proved to be much higher than Team Transitory’s projections.