While the market chatter in the run-up to Wednesday’s Federal Reserve interest rate decision has understandably focused on whether the increase will be 50 or 75 basis points, the critical issue in play is a broader one. For its sake and that of both the domestic and global economy, the central bank desperately needs to regain control of the inflation narrative.
The persistent failure to do so in the past 12 months is turning the perception of the Fed from the world’s most powerful central bank — long respected for its ability to anchor global financial stability — to an institution that too closely resembles an emerging-market bank that lacks credibility and inadvertently contributes to undue financial volatility. Regaining control of the inflation narrative is critical to the Fed’s policy effectiveness, its reputation and its political independence. The longer this takes, the greater the negative effects on economic well-being and social equity in the US, and the larger the negative spillovers for the rest of the world.