After getting inflation so wrong, can the Fed now get it right?

IT WAS A simple, stunning admission. “We have had price stability for a very long time and maybe come to take it for granted,” said Jerome Powell, chairman of the Federal Reserve, last month. Many factors explain the latest burst in inflation, with snarled supply chains, tight job markets, generous fiscal stimulus, loose monetary policy and, more recently, the war in Ukraine all part of the fabric. But one thread runs through them all. Investors, analysts and, crucially, central bankers believed that high inflation in America had been consigned to history, a problem more for academic studies than for current policy.

No one now doubts that inflation is a problem for today. Consumer prices rose by 8.5% in March compared with a year earlier, a four-decade high. Belatedly, the Fed has swung into action. As recently as mid-2021 most members of its rate-setting committee believed that it would not raise interest rates at all this year (see chart 1). At its meeting in March, however, Fed officials concluded that they would raise rates by nearly two percentage points in 2022, setting America up for one of its steepest tightening cycles in a quarter of a century. How did the Fed get it so wrong? And does its sharp shift mean that it is at last getting it right?