The U.S. Federal Reserve faces a challenging question at its policy-making meeting today and tomorrow: How to respond to inflationary pressures that are proving much stronger than expected? If officials don’t announce a much more aggressive path of interest-rate increases than I expect they will, their passivity will risk a repeat of the Great Inflation of the 1970s.
The economic situation has changed dramatically over the past year. In December 2020, inflationary pressures were muted, as they had been for much of the preceding decade: The Fed’s preferred measure of consumer prices — the core index for personal consumption expenditures – was up just 1.5% from a year earlier. Now, core PCE inflation is running at 4.1% (as of the latest reading in October), more than double the central bank’s target and the fastest pace in more than three decades.
