How the inflation genie got out of the bottle

MarketWatch/Greg Robb/11-2-2022

illustration of a genie out of the bottle commanding the world

“Critics have pounced on the Fed. Powell’s insistence that rising inflation was ‘transitory’ and would quickly dissipate once the economy reopened more fully has been called ‘probably the worst inflation call in Fed history’ by Mohamed El-Erian, chief economic adviser for Allianz. The economist Stephen Roach has compared Powell to former Fed chair Arthur Burns, whose indecisiveness under intense political pressure led to the crushing inflation of the 1970s.”

USAGOLD note: This article outlines four reasons for the Fed’s Big Miss. Of the four, the one that seems to carry the most weight is the new policy framework the central bank announced in August 2020. It would now be “more patient” about tamping down inflation at the first signs of its presence. That, says Amherst Perpoint’s Stephen Stanley, would make future Fed policy reactive rather than proactive as it was in the past – a framework that would permanently put the Fed behind the inflation curve. “By the time the Fed realized that policy was too easy,” he says, “the inflation genie will be out of the bottle. By the way, this is exactly the approach that got the Fed in so much trouble in the late 1960s and 1970s.” As we all know, once the genie is out of the bottle, it is difficult to get it back in.