Is the Federal Reserve examining the link between high inflation and US monetary policy over the past two years? A reporter posed this question to Fed Chairman Jerome Powell during a June 15 press conference. After acknowledging that the Fed was doing it “very cautiously,” the president veered off course. He said that for decades inflation has been “dominated by disinflationary forces”, but recent history has been plagued by “extraordinary shocks”. Highlighting the pandemic, the war in Ukraine and the shutdowns in China, he concluded: “We are aware that a different set of forces are driving the economy.
Yet Mr. Powell neglected to mention the expansionary monetary and fiscal policies of 2020 and 2021 which surely contributed to the upward pressure on prices. More importantly, it missed the main culprit: the Federal Reserve. The Fed lost control of inflation by abandoning its decades-long strategy of preemptive restraint, that is, tightening before inflation takes hold. This policy, promoted by Fed Chairman Paul Volcker in the 1980s, provided price stability for nearly 40 years.