The Fed’s Monetary Policy Exit Once Again Behind the Curve

Friday, May 6, 2022

Every business cycle has different characteristics that economic policymakers influence and respond to. The 2020 pandemic posed a negative shock to aggregate supply and aggregate demand. Pent up demand and unprecedented fiscal stimulus and sustained aggressive monetary ease fueled a V-shaped recovery involving strong demand amid ongoing supply constraints. The Federal Reserve now finds itself in an uncomfortable situation that it failed to anticipate, but one that has occurred before in its modern history: it faces undesired high and rising inflation and is behind the curve, and must tighten monetary policy just enough to reduce inflation but not so much as to generate a recession. 

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