Nor was the Fed’s policy the only thing that mattered for inflation. Had the Fed begun to pull back policy support last year, it might have slowed the housing market more quickly and set the stage for slower demand, but it would not have fixed tangled supply chains or changed the fact that many consumers have more cash on hand than usual after repeated government relief checks and months spent at home early in the pandemic.
Inflation F.A.Q.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“I think it would look somewhat different,” Mr. Kohn, who has been critical of the Fed’s slowness, said of the economy had it reacted sooner. “Would it look a lot different? I don’t know.”
Still, the gradual reorientation away from easy monetary policy could give inflation the time to become a more permanent feature of American life. Once rapid price gains are embedded, they may prove harder to eradicate, requiring higher rates and possibly a more painful increase in unemployment.
For now, longer-term consumer inflation expectations have remained fairly steady, though short-term expectations have surged. The Fed is moving rapidly now to avoid a situation in which inflation changes expectations and behavior more lastingly.
James Bullard, the president of the Federal Reserve Bank of St. Louis, has even suggested that officials could consider a 0.75-point rate increase — though his colleagues have signaled little appetite for such a large move at this meeting.
Michael Feroli, chief U.S. economist at J.P. Morgan, said in a research note that while “it’s pretty clear that this economy doesn’t need stimulative monetary policy,” he didn’t expect the Fed to raise interest rates by that much, especially because it tended to broadcast its moves ahead of time.
“But if there is a time to break from habit, it’s when the Fed’s inflation credibility is being called into question, and so we don’t write off the possibility of a larger rate move,” he said.
Article source: https://www.nytimes.com/2022/05/04/business/economy/federal-reserve-inflation-recession.html
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