Expect to see lots of excuses coming out of the Fed along the lines of, “Almost no one expected inflation to get this bad”. That’s true, but it’s no excuse. A few people did forecast very high inflation, but it is true that most people (including me) did not expect inflation to get this high. But bad forecasting is not the primary problem.
The current inflation problem, or at least the demand-side inflation portion of the problem, comes from the Fed’s decision to make FAIT asymmetric, making up for inflation shortfalls but not overshoots. That’s the problem, not the fact that the Fed misjudged the situation. Under an effective policy regime (such as NGDP level targeting or symmetrical FAIT) Fed misjudgments are far less costly than under the current regime. When demand is becoming too strong, markets would quickly correct policy mistakes by moving longer-term interest rates up to a level that would restrain spending, in anticipation of future Fed rate changes. That did not happen in 2021.
Here’s another misconception. People say that 5-year TIPS spreads have not changed much over the past 6 months, therefore the inflation situation is not getting worse. That overlooks the fact that actual inflation over the past 6 months has been extremely high. Thus the market forecast of where the price level will be at the end of 2026 is significantly higher than it was just 6 months ago. The inflation situation is clearly getting worse. And five years from now, many of the current supply bottlenecks will likely be resolved.
Another argument is that inflation doesn’t matter, it’s NGDP growth that matters for monetary policy. I agree, but NGDP growth has also been far too high.