Raphael Bostic, Essay: Striking a Delicate Balance in Making Policy

Inflation

“Amid some signs that price pressures could be receding, a narrative has gained momentum among some commentators that the Fed should consider reversing its course of raising the federal funds rate lest we go too far and cause undue economic hardship.”

“While that perspective is understandable, history teaches that if we ease up on inflation before it is thoroughly subdued, it can flare anew. That happened with disastrous results in the 1970s. After the FOMC loosened policy prematurely, it took about 15 years to bring inflation under control, and then only after the federal funds rate hit 20 percent.”

“We don’t want a repeat, so we must defeat inflation now.”

Fed Funds

“So, now we must determine when inflation is irrevocably moving lower. We’re not there yet, and that is why I think we will need to raise the federal funds rate to between 5 and 5.25 percent and leave it there until well into 2024.”

Inflation Expectations

“The final guidepost I’l mention is inflation expectations, which, I’ve noted in a past message, have been recognized as a key factor in driving behavior. When people expect higher prices, they can sometimes make economic decisions that are likely to ensure that inflation materializes. You’ve no doubt heard people talk about wage-price spirals in past inflationary episodes, during which workers anticipating high inflation demanded higher wages, which in turn led firms to increase prices to cover rising labor costs.”

“Here the news is good. Our own Business Inflation Expectations Survey and similar measures show that expectations for inflation over the next year have steadily declined since the spring of 2022. The same story goes for expectations in financial markets and among consumers.”