Powell Admits Fed's Inflation Misjudgment, Tightens Policy

Federal Reserve Chair Jerome Powell acknowledged that the central bank underestimated the duration and magnitude of inflation in 2021, as the U.S. economy rebounded from the COVID-19 pandemic. In a speech at the National Association for Business Economics conference, Powell admitted that the Fed believed the inflation surge would be temporary and transitory, a view that has since proven incorrect.

The Fed's initial assessment was based on the belief that the inflation spike was primarily driven by temporary factors, such as supply chain disruptions and pent-up demand. However, as the months passed, it became clear that inflation was more persistent than initially thought. The consumer price index (CPI) rose 7% in 2021, the highest rate in nearly 40 years, and has remained elevated in 2022.

Powell's acknowledgment comes as the Fed has shifted its monetary policy stance to combat inflation. In March, the central bank raised its benchmark interest rate by 0.25 percentage points, the first increase since 2018. The Fed has also indicated that it will continue to raise rates and reduce its balance sheet to bring inflation back to its 2% target.

The Fed's policy shift has been accompanied by a series of economic projections, which now anticipate a more aggressive tightening of monetary policy. The central bank's latest projections show that it expects the federal funds rate to reach 1.8% by the end of 2022, up from its previous projection of 0.3%. The Fed also expects GDP growth to slow to 2.8% in 2022, down from its previous estimate of 4%.

The Fed's acknowledgment of its past inflation misjudgment is a significant shift in its communication strategy. In the past, the central bank has been reluctant to admit mistakes, preferring to emphasize the challenges of forecasting in an uncertain economic environment. However, Powell's recent remarks suggest that the Fed is now more willing to acknowledge its past errors and take responsibility for its role in the inflation surge.

The Fed's newfound candor is likely to be welcomed by markets and the public, who have been critical of the central bank's initial response to inflation. However, it remains to be seen whether the Fed's policy shift will be sufficient to bring inflation under control. The central bank faces a delicate balancing act, as it seeks to combat inflation without triggering a