Inflation and the Fog of War

With inflation at 8.5%, observers wonder what the Federal Reserve did wrong. But here’s one thing the Fed did right: In August 2020, it announced a major change in how it sets interest rates by abandoning its longstanding practice of raising them preemptively to avoid the inflation. But if it was necessary, it was not enough.

In announcing the move, Fed officials rightly admitted that there is no “exact science” to applying rigid inflation benchmarks. But they haven’t quite explained the science behind that statement. Nor did they point to historical precedents that show why reliance on the measured rate of inflation can lead to bad decisions, especially in times of war or comparable crisis like the Covid pandemic.


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