Sunday, October 27, 2024

How unusual was the Federal Reserve response to the post-Covid inflation?

This graph at FRED: https://fred.stlouisfed.org/graph/?g=1x6Ir

It was most extremely unusual.

The graph shows the FedFunds rate, the interest rate set by the Fed to manage inflation and economic growth. Usually I just look at the raw data: it is down near zero bla bla bla, it is up near 5 percent yadda yadda yah. This time I'm looking at the "percent change from year ago" in the data -- the same measure people most often use when they talk about the rate of inflation.

The graph goes back to the start-of-data. At no other time was the interest-rate increase anywhere near the extreme reached during the post-Covid inflation -- during, you know, the so-called "Biden inflation". 

The bizarre FedFunds interest rate activity of the post-Covid period was due to 

  • the long delay before the Fed began raising the interest rate; and
  • the urgency that arose because of that year-long delay.

A less bizarre response would have begun after less delay and could therefore have been more gradual. The less bizarre response would have slowed the increase in prices sooner, and would have caused inflation to top out at a much lower level.

There is only one question that remains, far as I can see: Who was responsible for the delay?

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