Fed Needs to Resist Opting Again for Quick and Easy

Over the last 18 months or so, the quick and easy interpretation of inflation data has turned out to be incorrect. Will it be different going forward? Markets sure hope so. Federal Reserve officials seem more cautious, and rightly so. The markets’ latest narrative pivot is not the right one for the world’s most powerful central bank.

When the inflation threat first reared its ugly head early last year, the Fed, most market participants and analysts found immediate reasons to dismiss it. The drivers were external, tiny in number and historically inclined to be quickly reversible. Opting for the “transitory” characterization was quick and easy to do, especially because it did not require any change in approach. After all, you just “look through” transitory phenomena.

As inflation persisted and accelerated, markets shifted away from the transitory view, but the Fed clung to it until the end of November. By that time, inflation had started to become more deeply embedded in the economic system, and its drivers were broadening.