Fed Messed Up With Its Inflation Estimates

FED Chair Jerome Powell stated today that he overestimated the impact of inflation and that the FED should have acted sooner to try to control the spiralling effects.

Republican Rep. Ann Wagner told Powell that she believes the Fed “underestimated actual inflation” and wondered what officials were missing.

According to CNN, Powell admitted that the US central bank underestimated the risk of high inflation.

“We definitely underestimated it. We clearly did, with the benefit of hindsight “Powell responded by reiterating previous remarks in which he acknowledged that the Fed should have moved faster to combat inflation.

The Fed chairman stated that it all comes down to the decision officials had to make about when supply-side issues associated with Covid-19 would ease.

He stated that the FED calculated the risks of inflation on subjective elements such as society finishing COVID-19 by the end of this year or people flocking back to work due to vaccination rollout.

Inflation and unemployment

The FED did not count on the ‘great resignation’ nor on the fact that many businesses are shut and cannot come back to life due to financial difficulties.

This has impacted employment and now the FED is saying that aggressive interest rate hikes aimed at containing inflation may raise unemployment on Main Street

Powell stated that while it is “certainly possible” to control inflation without causing job losses, this may not be the case.

“There is a risk that unemployment will rise from what is currently a historically low level,” Powell said during a hearing before the House Financial Services Committee.

Powell stated that the Fed’s interest rate increases are “designed to drive growth down to a more sustainable level and give the supply side a chance to catch up.”

However, he admitted that the Fed lacks “precision tools” and that job losses are possible.

More Misjudgments

He explained that the Fed misread inflationary problems because officials blamed them on supply constraints caused by uncertainty in supply chains and workers returning to the labour market after receiving COVID-19 vaccines.

Powell now attributes four-decade-high inflation to “very strong demand.”

He told lawmakers that the Fed’s actions during the coronavirus pandemic were all based on judgement calls, which “every central bank had to make.”

“That was the decision we had to make. We were aware that something could go wrong. “And when things started to go wrong, we shifted,” he added.

Essentially, Powell is saying, ‘I messed up guys, but all central banks will also mess up on this.”