When did the Fed change its tune?

The Federal Reserve is finally taking a hard line on inflation. The Federal Open Market Committee (FOMC) raised its federal funds rate target by 50 basis points in May. When it meets in June and then again in July, it will probably increase its target by another 50 basis points. Fed Chair Jerome Powell acknowledges that “there may be some pain involved in restoring price stability,” but concludes that “this is something we need to do.”

To some, the Fed’s recent austerity measures seem too small, too late. The Personal Expenditure Price Index (PCEPI), a measure of the Fed’s preference, has been rising for more than a year and began accelerating last October. But the Fed kept its target rate unchanged until March and did not change significantly until May. Even so, owning one is still beyond the reach of the average person. Over the next ten years, the bond market continues to be more than 2 percent inflation per year.

Why did the Fed wait so long to address the inflation problem? One could argue that Fed officials did not realize that inflation was a problem until it was too late. However, this view appears to be inconsistent with the inflation estimates of most FOMC members, which exceeded 2 percent in March 2021 and have increased every quarter since then. This appears to be inconsistent with FOMC statements, which suggest that Fed officials realized that there was an inflation problem in mid-December 2021.

FOMC statement

The FOMC issues a statement after each meeting to summarize its assessment of the economy and indicate how it will adjust monetary policy, if any. These statements are said with care and do not change much from meeting to meeting. When change occurs, however, it gives some indication of how Fed officials’ thinking has changed. In the following, we identify significant changes in the FOMC statement over the last fourteen months.

March 17, 2021: “… inflation continues below 2 percent. ”

At the start of the epidemic, price levels have fallen below the Fed’s 2 percent inflation target. It did not return to that growth path until March 2021. Of course, it takes time to collect and report data. When the FOMC met on March 17, it contained PCEPI data for January (published February 28) and consumer price index (CPI) data for February (published March 10). In light of the available data, it is reasonable to conclude that inflation has remained below the target — and the Fed has done so.

April 28, 2021: “… Inflation has risen, largely reflecting transient factors. ”

When the FOMC met at the end of April 2021, it had PCEPI data for February (published March 26) and March CPI data (published April 13). Based on this new information, the Fed has changed its assessment. It acknowledges that inflation has risen, but blames it on transient factors. It did not expect inflation to remain high.

June 16, 2021: “… Inflation has risen, mainly reflecting transient factors. ”

July 28, 2021: “… Inflation has risen, mainly reflecting temporary factors. ”

September 22, 2021: “… Inflation has risen, reflecting the transient factors. ”

The FOMC continues to blame high inflation for transient factors until September 2021. When it met in September, it contained PCEPI data for July (published August 27) and CPI data for August (published September 14). Prices were definitely improved. July PCEPI data showed that prices were 1.4 percent higher than the 2-percent growth path projected from January 2020. But the primary reason for the high price was less clear

If prices are raised due to epidemic-related supply constraints, they can be expected to return once those constraints are relaxed. If, instead, they are upgraded due to a nominal cost increase, the Fed will have to take steps to bring prices down again (or, see them stay permanently improved). Fed officials clearly took the view of supply constraints, maintaining that inflation was largely transient.

November 3, 2021: “… Inflation has risen, reflecting the expected temporality. ”

The FOMC began changing its tone in early November 2021. Whereas earlier it attributed high inflation to “temporary causes”, now it has attributed “expected causes to temporary causes.” It was still a small admission of suspicion from the confident Fed.

Doubts about the transient nature of inflation were certainly raised in early November. At the time, the FOMC had PCEPI and CPI data for September (published October 29 and 13, respectively). It knew prices had exceeded FOMC member estimates (which were revised in both June and September) and were now 2.3 percentage points higher than the 2-percent growth path, despite easing supply constraints and strong growth in real output and employment.

December 15, 2021: “… epidemic-related imbalances in supply and demand and the resumption of the economy continue to contribute to high levels of inflation. ”

The FOMC statement changed significantly in December 2021. The word “temporary” was dropped altogether, in line with Powell’s remarks on 30 November. The statement also acknowledged that demand-side factors are contributing to inflation, suggesting that prices will not return to normal unless the Fed takes action to reduce prices.

Somewhat surprisingly, in light of the apparent change in the FOMC statement, the Fed did not take action to bring prices back. This left its federal funds rate target unchanged in December and January. It raised a modest 25-basis points in March and then set its target there until May. In April, Economist The magazine asked if the Fed could stop an “innocent inactivity”. The Fed recognized prices were too high. But it is not doing anything to bring prices back without expecting them to lower themselves.

January 26, 2022: “… epidemic-related imbalances in supply and demand and the resumption of the economy continue to contribute to high levels of inflation. ”

March 16, 2022: “… Inflation remains high, reflecting the imbalance of supply and demand in relation to epidemics, high energy prices and greater price pressures. ”

May 4, 2022: “… Inflation remains high, reflecting epidemic-related supply and demand imbalances, high energy prices and broad price pressures …”

In its January, March and May 2022 statements, the FOMC continues to acknowledge that demand-side factors are contributing to inflation. It added “energy prices” and “greater price pressures” as contributors in March, reflecting Russian aggression (and related supply disruptions) in Ukraine. But, otherwise, its statement was largely unchanged.


Monetary policy is difficult in real time. Data is collected and published with a lag. The effect of policy decisions is delayed. It is difficult to know what and how much to do at the moment.

FOMC statements suggest that, as of December 15, 2021, Fed officials realized that inflation was at least partly the result of demand-side factors and, therefore, needed to be reduced somewhat with the tightening of monetary policy. And, nevertheless, the Fed basically failed to act until May 2022.

One could excuse Fed officials for being too late to recognize the inflation problem. Reasonable people may disagree that the Fed should have known when inflation was too high. But once the problem is acknowledged there is no excuse for a substantial delay before acting. Perhaps a December 2021 rate hike made markets panic, as the Fed has just revised its outlook and has not had time to manage forward guidance. But the Fed had a chance in January and March. And it could call a special meeting in February or April. Instead, it waited until May.

The Fed could and should take swift action to reduce inflation. That did not happen. Inflation is much higher now and much harder to deal with than it would have been otherwise.

William J. Luther

William J. Luther

William J. Luther is the director of AIER’s Sound Money Project and an associate professor of economics at Florida Atlantic University. His research primarily focuses on the question of currency acceptance. He has published articles in leading Scholarly journals, including the Journal of Economic Behavior and Organization, Economic Inquiry, the Journal of Institutional Economics, Public Choice, and the Quarterly Review of Economics and Finance. His popular writings have been published in The Economist, Forbes and US News & World Report. His work has been featured in major media outlets including NPR, Wall Street Journal, The Guardian, Time Magazine, National Review, Fox Nation and Vice News.

Luther earned his MA and PhD. He holds a BA in Economics from George Mason University and a BA in Economics from Capital University. She was a participant in the AIER Summer Fellowship Program in 2010 and 2011.

Selected publications

“Cash, Crime, and Cryptocurrency.” Co-author with Joshua R. Hendrickson. Quarterly Review of Economics and Finance (Upcoming).

“The independence of the central bank and the new operating regime of the Federal Reserve” Jerry L. Co-author with Jordan 6 Quarterly Review of Economics and Finance (May 2022).

“Federal Reserve’s response to COVID-19 contraction: a preliminary assessment.” Nicholas Kachanowski, Brian Katsinger, Thomas L. Co-author with Hogan and Alexander W. Salter. Southern Economic Journal (March 2021).

“Is Bitcoin Money? And What Does That Mean?” Co-author with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020).

“Is Bitcoin a Decentralized Payment Mechanism?” Co-author with Shawn Stein Smith. Institutional Economics Journal (March 2020).

“Endogenous matching and random cost means money with choice.” Thomas L. Co-author with Hogan. BE Journal of Theoretical Economics (June 2019).

“Adaptation and central banking.” Co-author with Alexander W. Salter. Public choice (January 2019).

“Down from the ground: the case of Bitcoin.” Institutional Economics Journal (2019).

“Banning Bitcoin” co-authored with Joshua R. Hendrickson. Journal of Economic Behavior and Organization (2017).

“The Political Economy of Bitcoin.” Co-authors with Joshua R. Hendrickson and Thomas L. Hogan. Economic research (2016).

“Cryptocurrency, network impact and switching costs.” Contemporary economic policy (2016).

“Positively valuable Fiat money after the disappearance of the sovereign: the case of Somalia.” Lawrence H. Co-author with White. Behavioral Economics Review(2016).

“The financial system of stateless Somalia.” Public choice (2015).

Books by William J. Luther

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William J. Bergman

William Bergman is an assistant instructor who teaches finance courses at Loyola University Chicago. From 2013 to early 2022, he was director of research for Truth in Accounting, a non-profit organization dedicated to educating citizens about government finance and financial reporting. He also has 13 years of background as an economist and financial market policy analyst at the Federal Reserve Bank of Chicago. Bill worked for AIER for one year after leaving the Fed in 2004, serving as director of the Summer Fellowship Program. Bill is a member of AIER’s Standing Committee. She is married, with three children.

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