Containing Inflation

It’s time to begin to normalize rates. The worst of the pandemic is behind us, and we are 22 months into the fastest recovery in our memory. The economy is no longer in need of aggressive Fed support. Instead, we need to put ourselves in a position to contain inflation. It’s our job to do so — the Fed’s mandate requires us to promote stable prices. Some worry that raising rates to control inflation necessarily drives the economy into a recession. And with the surge in energy prices since the Ukraine invasion, some even raise the topic of stagflation — a word from the 70s. The rate path we announced this week shouldn’t drive economic decline. We are still far from the level of rates that constrains the economy. Prior to our meeting, there was much debate about whether the Fed should move faster. We have moved at a 50-basis point clip in the past, and we certainly could do so again if we start to believe that is necessary to prevent inflation expectations from unanchoring. But setting the right pace for rate increases is a balancing act — we normalize rates to contain inflation, but if we overcorrect, we can negatively impact employment, which is the other part of our dual mandate.