Federal Reserve Chair Jerome Powell admitted that he was wrong to expect inflation would be transitory when it started to rise three years ago.
Powell said that “in the fourth quarter of ’21, it became clear that inflation was not transitory,” in a rare television interview broadcast with CBS’s 60 Minutes program on Sunday night.
Powell and other Fed officials brushed off the rise in inflation in early 2021 because they believed it was caused by temporary economic dislocations tied to the pandemic that would resolve themselves without a need for action by the central bank.
“We saw what we thought was that this inflation, which seemed to be mostly limited to the goods sector and to the supply chain story. We thought that the economy was so dynamic that it would fix itself fairly quickly. And we thought that inflation would go away fairly quickly without an intervention by us,” Powell said. “That it would be transitory.”
Powell defended what he now sees as a mistake by saying that this was a view widely held by economists at the time. He also acknowledged that there were some economists who warned inflation was likely to be persistent and require tighter monetary policy.
When the Fed realized it had made a mistake, it shifted to what it viewed as a more restrictive monetary policy. The Fed began to prepare the market for the shift in the summer of 2021 but it did not raise rates until March 2022.
“And we pivoted and started tightening. And as I said, it’s essential that we did that. It was critical that we did that. And that’s part of the story why inflation’s going down now,” Powell said.
The concession of the mistake and the need for higher rates is a subtle rebuke to some, such as New York Times columnist Paul Krugman, who have clung to the view that inflation was transitory. Many progressives have argued, without evidence, that inflation would have come down without the Fed’s tightening.