Central banks pay cost of rear-view-mirror driving

Prices are seen on wine bottles displayed in a store in Manhattan, New York City, U.S., March 28, 2022.

LONDON, April 12 (Reuters Breakingviews) - Central bankers are paying the price of relying too much on the rear-view mirror. None more so than Federal Reserve Chair Jerome Powell.

U.S. consumer prices surged 8.5% in the 12 months ending March, official data showed on Tuesday. It was the biggest jump since 1981 and three times higher than a year ago. Inflation may now be at or near its peak. But prices will still rise faster than the Fed’s goal for some time despite a series of interest rate hikes that are in the offing. Powell’s mistake was using an approach that paid too little heed to real-time markers of price pressures.

Cleveland Fed President Loretta Mester said on Sunday inflation will remain above 2% this year and next. Unexpected shocks, like jumps in energy prices after Russia invaded Ukraine, are partly responsible. But so is the policy framework, called flexible average inflation targeting, that Powell unveiled in 2020. This compass was designed to cope with an economy that generated too little inflation, and failed when prices began rising more quickly. Its shortcomings meant Fed officials were tardy in raising interest rates and are playing catch-up read more .

It’s a near-certainty that Powell will increase the target fed funds rate by half a percentage point in May from 0.25-0.5%, according to the CME Group’s FedWatch tool. And there’s a 70% probability that the policy rate will reach at least 2.5% by the end of 2022. While inflation may warrant a rapid series of hikes, aggressive tightening carries risks for the economy, as Fed Governor Chris Waller acknowledged on Monday when he said a “brute-force tool” like rate rises could sometimes cause collateral damage. Economists polled by Reuters see a one-in-four chance of a U.S. recession in the coming year, rising to 40% in the next 24 months read more .

Critics of the Fed’s policy framework pointed out its main flaw in advance. Targeting average inflation is a recipe for leaving policy too easy for too long and then having to tighten very fast. Peers like the Bank of England were similarly so focused on the low inflation that they were slow to spot new problems. Placing more emphasis on disruptions to labour markets and supply chains, rather than thinking that past patterns would reassert themselves, would have helped policymakers do a better job of planning for the future.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)


- U.S. consumer prices rose 8.5% in the 12 months ending March, the U.S. Labor Department said on April 12. That was the largest increase since 1981 and followed a 7.9% jump in February.

- Excluding food and energy costs, consumer prices rose 6.5%, the largest 12-month change since 1982.

Editing by Lauren Silva Laughlin and Sharon Lam

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Swaha Pattanaik is Global Economics Editor at Reuters Breakingviews, based in London. Previously Reuters’ EMEA financial markets editor, she writes about global financial markets, macroeconomics, and policymaking. She was posted to Paris as Reuters’ senior economics correspondent and to Brussels as its European economic and monetary affairs correspondent. Before then she was the head of the Reuters FX reporting desk in London. Prior to joining Reuters, she worked for Bloomberg, Euromoney, and consulting firm IDEA. She has an MSc in Political Theory and Political Sociology from Birkbeck and a BSc (Econ) in Mathematical Economics and Econometrics from the London School of Economics.