The President of the US Federal Reserve acknowledged errors in the inflation estimate.
(Photo: Reuters)
With an interest rate hike of three quarters of a percentage point, the US Federal Reserve has taken an unusual step: the step is the largest in almost 30 years. The good news is that the Fed is now clearly prioritizing fighting inflation. In contrast to the European Central Bank (ECB), for example, it also has full employment as its goal, which is equally important to price stability. But Fed Chair Jerome Powell made it clear after the meeting of the Monetary Policy Committee that the labor market cannot function well in the long term without stable prices.
The bad news: Powell seems driven. As his critics accuse him of, he didn’t act, he reacted. He admits relatively openly that he has repeatedly been surprised by the strength of inflation. In this role, as a driven person, it will be difficult for him to achieve a so-called “soft landing” for the economy. So stopping inflation without triggering a deep recession.
Powell has also repeatedly stressed that the world has changed completely with the pandemic and Putin’s war of aggression in Ukraine. For decades, prices have been rising too slowly, now they are running away. This trend is not “temporary”, as many initially believed. It is still unclear whether it will really remain permanent. But it is striking that bank economists are now preparing for a longer period of higher inflation.
Maybe we really do live in a new world of prices rising a little faster in the long run, because of the shrinking population, tight labor markets, high investments in armaments and climate-friendly energy and higher real interest rates. This doesn’t have to be a bad world once it gets back into balance and everyone gets used to it. But the transition is difficult.
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