Why the Federal Reserve Keeps Underestimating Inflation
The Fed messed up. Big time. After almost 40 years of low, predictable price growth, inflation is back: 8.5% at last count and it may go higher still. Some of the inflation is related to pandemic re-opening, but some of it came from serious policy errors. Now the Federal Reserve faces some hard choices. It may even need to cause a recession to bring inflation back to manageable levels. Can it manage that without getting the country into deeper economic trouble?
To better understand all the risks, I asked someone whose own long history with the Fed gives him some particular insights. Dartmouth University Economics Professor Andrew Levin was an early skeptic that inflation was transitory and would go away on its own. Levin worked for a couple of decades at the Federal Reserve Board, including two years as a special adviser on monetary policy strategy and communication. The conversation has been edited for length and clarity.
Allison Schrager: Do you think that the Fed and the financial markets are finally being realistic about inflation prospects?
Andrew Levin: Unfortunately not. The problem is that the Federal Reserve in its projections is still emphasizing a baseline outlook in which inflation comes back down to around 3% within the next few quarters, but Fed officials are not talking about more risky scenarios. In fact, there are a lot of factors that may drive inflation even further upward.
Schrager: And those factors are….?