Winning the War on Inflation

The pre-pandemic decade was an unusually stable one in economic terms. COVID disrupted that stability. And similar to a post-war period, we are seeing the economy now struggle to return to normal. At first, inflationary pressures seemed temporary. But inflation has persisted, risen and become broader based. It’s the Fed’s responsibility to act to reduce inflation and stabilize expectations, and we are. The Fed’s tools work over time, so I expect inflation to come down, but not immediately, not suddenly, and not predictably. I see inflation coming down in three lanes: demand should flatten, supply chains should heal and commodities should settle. The pace of normalization is uncertain, which is understandably unsettling and leads to worries about a recession. We are out of balance today because stimulus-supported excess demand overwhelmed constrained supply. Returning to normal does not require a calamitous decline in activity. Moderating demand has a higher purpose squarely in our mandate: containing inflation. We have been reminded this year: inflation is painful and people hate it.