Recent news of unexpectedly high inflation — prices rose by 8.3% in the year to August — made the Federal Reserve’s task this week a little easier. It affirmed investors’ belief that monetary tightening still has a way to go, and that the central bank will most likely raise its policy rate by another 75 basis points on Wednesday. The more difficult question is what comes after that.
This week’s expected increase would leave the target range for short-term rates at between 3% and 3.25%. That’s still substantially negative in real terms, even allowing for the fact that core inflation of 6.3% is lower than the headline rate. Although the Fed is reining back its stimulus, monetary policy is not yet pressing strongly down on demand. Such gradual tightening might be prudent — but only if the central bank makes clear that it’s ready to go further as necessary and will do whatever it takes to get inflation back on track.