elerian140_Kent Nishimura  Los Angeles Times via Getty Images_powell inflation Kent Nishimura Los Angeles Times via Getty Images

Can the Fed Overcome Its Transitory Policy Mistake?

The later the US Federal Reserve is in reacting properly to inflationary developments, the greater the likelihood that it will have to hit the policy brakes hard, causing market turmoil and unnecessary economic pain. The Fed must now do two things quickly.

CAMBRIDGE – It took way too long, but key officials at the US Federal Reserve have finally acknowledged that for months they mischaracterized an inflationary surge that has proven larger and more persistent than they expected. That recognition is welcome, especially given the likelihood that inflation will remain uncomfortably high in the coming months. The challenge now, not just for the Fed but also more broadly for the United States and other major economies, is to navigate a policy terrain in which communication and implementation have been rendered significantly more complex by a fundamental misreading of inflation as β€œtransitory.”