That caused the Fed to change course – and quite abruptly – at the end of last year.
“Inflation really picked up in the late spring of last year, and we had this idea – it became very, very widely accepted in the forecasting community – that this would be temporary,” said Mr. Powell in December. But officials became more concerned as employment cost data rose and inflation indicators showed hot numbers, he said, so they turned policy.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“It was essentially higher inflation and faster, turns out much faster, progress in the job market,” Mr Powell said.
Asset prices have fluctuated in recent weeks as investors try to understand what the Fed’s new stance is and what it will mean for the economy. Stocks have generally collapsed, Bitcoin prices have fallen and bond prices have risen as part of the cacophony.
If the Fed had changed course earlier, “there wouldn’t be a sense that the Fed is behind the curve and not the fear in the market that they will go aggressive,” Jefferies’ Ms. Markowska said.
Part of the challenge is that, while the central bank had clearly worked out a plan for when it would slow down bond buying and raise interest rates — emphasizing the terms it would like to see — it wasn’t too clear about its next steps.
Mr. El-Erian believes that the Fed should stop buying bonds immediately while clearly stating the course ahead. Otherwise, he said, officials risk having to withdraw aid in one go later this year.
But there are also arguments for gradualism.
Foreign economic officials are watching the Fed’s path nervously, especially when other central banks also withdraw support amid a widespread price explosion — the Bank of England has already raised interest rates, for example. When major economies increase domestic borrowing costs, it can lead to capital outflows from emerging markets, fluctuating exchange rates and hurting or destabilizing their economic growth.
“If major economies put on the brakes or reverse their monetary policies, there would be serious negative spillovers,” China’s President Xi Jinping said in a speech this month, warning of “challenges to global economic and financial stability.” .”