The writer is the Alfred Lerner professor of banking and financial institutions at Columbia Business School and a former governor of the US Federal Reserve
The US Federal Reserve has been mugged by reality. Current inflation now exceeds 6 per cent, a level not seen in almost 40 years, and is proving to be far more persistent than Fed policymakers have projected. Why is Fed monetary policy behind the curve in tightening monetary policy to control inflation?
Three flaws in the Fed’s monetary policy framework have led to overly expansionary monetary policy.
First, there has not been enough focus on demand shocks. The Fed has based its view that the inflation surge would be shortlived on the extensive negative supply shocks that Covid-19 has imposed on the economy.
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