It is therefore encouraging that, on the very last day of November, Powell made a sudden inflation U-turn and stated that it was time to “retire” the transitory characterization. The Fed must now follow up by doing two things quickly. First, as part of an urgent effort to regain the credibility that is essential for its forward policy guidance and operational independence, it should publicly detail why it got its inflation call wrong and what is being done to avoid similar slippages in the future. Second, the Fed must move a lot faster in tapering its monthly asset purchases. Easing its foot off a stimulus policy accelerator that is still essentially in a “pedal to the metal” mode will help to mitigate the risk that the Fed will have to slam on the policy brakes in a disorderly manner in mid-2022.
Mohamed A. El-Erian, President of Queens’ College, University of Cambridge, is Professor at the Wharton School, University of Pennsylvania, and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, Random House, 2016.