Central Bank Predictability and Sloth Have Their Costs
One obvious byproduct is upward pressure on inflation. But there are also huge benefits for for governments: their debt burdens fall.
A central bank that moves too slow can be dangerous.
Photographer: Yuri Cortez/AFP via Getty Images
There are many possible reasonable reactions to the Federal Reserve’s belated move to raise its target interest rate by a quarter of a percentage point last week. I’d be hard-pressed to liken current Fed Chair Jerome Powell to Paul Volcker as one of them, as some have done. Volcker, you may recall, was the Fed chairman who pushed through a series of very sharp rate increases that put an end to rising inflationary pressures after more than a decade of acquiescence, albeit at the cost of two deep recessions in the early 1980s.
A better parallel might be Arthur Burns. The Fed that he led oversaw an annual inflation rate of 6.5%. But that might be unkind to Burns. At least on his watch, the Fed did something, with the target federal funds rate reaching 13% in 1974. The problem during the Burns era was that rates came down as swiftly as they had gone up. The present lot have haven’t even managed to do the first part. Indeed, you might be forgiven for thinking that the current Fed was trying everything it could to push inflation, currently running at about 8%, higher while appearing not to.