The Fed’s belated response to the spike in inflation is due to the unusual macroeconomic effects of the coronavirus pandemic, former Fed Chairman Ben Bernanke wrote in his op-ed in MarketWatch.
“The pandemic has confusing usually reliable indicators of labor market strength. In mid-2021, Fed leaders saw the economy far from full employment. The unemployment rate was 5.9% in June, well above the pre-pandemic level of 3.5%, and the number of employed was millions lower. However, during the pandemic, these indicators masked the true strength of the labor market,” Bernanke wrote.
“Many have been putting off returning to work because they need to care for relatives, because they are afraid of getting infected, or because they are re-evaluating their life priorities. Now, from sharply increased salaries and difficulties in finding employees, it became clear that the labor market in the last year was much stronger than traditional indicators suggested,” he added.
In the middle of last year, when non-food and energy inflation hovered around 3.5% in the middle of last year, Bernanke said the Fed attributed that to temporary factors linked to the economic recovery, including rising hotel and airline prices, supply chain problems and a surge in consumer spending. It seemed at the time that these factors would weaken as the pandemic eased. In addition, inflation expectations remained moderate, which only confirmed the Fed’s estimate.
In the end, it turned out that supply-side shocks were indeed an important factor behind the acceleration in consumer prices, but the effects were stronger and longer lasting than the central bank had anticipated. Price pressure then intensified due to further increases in food and fuel prices against the backdrop of events in Ukraine, Bernanke said.
“Now the task of the Fed is to slow inflation without triggering a recession,” Bernanke wrote, essentially repeating the words of current Fed Chairman Jerome Powell.
The Fed raised the rate by 25 basis points for the first time in 4 years in March 2022, then in May the cost of borrowing was increased immediately by 50 bp. – up to 0.75-1%. It is expected that the regulator will raise the rate at each meeting until the end of the year.