From WSJopinion: It has taken far too long, but the central bankers are getting closer to the degree of monetary tightening required to get inflation down
The Federal Reserve’s release of its latest economic thinking on Wednesday continued what you might call its gradual climb to meet inflation reality. It has taken far too long, but the central bankers are getting closer to the degree of monetary tightening required to get inflation down.
While the pace of rate increases has been fast in recent months, the story of the last year is how long it took the Fed to act. The median Fed projection for its target rate for 2022 has climbed from 0.9% last December to 1.9% in March, 3.4% in June and now 4.4%. That march upward reflects the Fed’s historic misjudgment in how high inflation would increase and how persistent it would turn out to be.
Even this might be optimistic if you consider Milton Friedman’s admonition that monetary policy operates with long and variable lags. This means today’s tightening might not have its greatest impact until the end of 2023 or into 2024. Equity markets voted with the pessimists Wednesday as they sold off late, and bond yields retreated from intraday highs.
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