Array
Federal Reserve Chairman Jerome Powell indicated at the year’s start that the bank would need to be nimble and humble in raising interest rates to address a serious inflation problem the Fed itself helped create last year. But the Fed was anything but nimble and humble this year in pursuing the most aggressive monetary-policy tightening since the 1980s.
Fortunately, the Fed seems to be changing its tune by intimating Wednesday that it will take stock of how its tightening to date is affecting the economy before barreling ahead with further aggressive interest-rate hikes.
In particular, it’s underlining that it “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.” It would have done even better had it raised interest rates Wednesday by 50 basis points rather than the 75 it did.
If there is one thing upon which almost all economists can agree, it’s that monetary policy operates with long and variable lags. By this it’s meant that one should not expect to see instantaneous results from monetary-policy tightening — rather, one will find its full effects only realized after a period of at least one year.
By its statement Wednesday, the Fed finally seems to be acknowledging the very large amount of monetary-policy tightening it has already undertaken and its likely long-term economic effects.
