Throughout 2021, the consensus among economists, politicians, and the mainstream media was that inflation would be “transitory”. This prediction implied price increases would be temporary as they claimed the economy’s supply chains would recover from dislocations caused by the pandemic.
For example, Biden said, “Our experts believe and the data show that most of the price increases we’ve seen were expected and are expected to be temporary. The reality is you can’t flip the global economics light back and not expect this to happen.” This is clearly not what happened as inflation soared to 40-year highs and has sustained levels far above the target rate of around 2 percent. The president of the Federal Reserve Bank of Minneapolis Neel Kashkari recently sat down with CNBC to discuss the state of the economy. See the video below.
"You were all on team transitory. Now, you're saying 'inflation is not coming down'. What if you're wrong?" CNBC asks Fed's Kashkari. pic.twitter.com/cfecirpPcb
— unusual_whales (@unusual_whales) February 19, 2023
The host began by asking, “You were all on team transitory and it turned out to be not quite so much transitory even though some of it may be transitory. And now you’re all like, inflation is not coming down we need to go to five [5 percent interest rate] come hell or high water pretty much. What’s What have you guys changed about how you do your business? So now I can believe Oh, you got it right this time. Let me some confidence here because there’s a lot of reason not to have confidence.”
Kashkari responded, “You know, we, I would say I learned over the past year or two that our models that we used to rely on forecasting inflation really failed in understanding the dynamics of reopening from the pandemic. And then that just told me we have a job to do we know that raising rates can put a lid on inflation, we need to raise rates aggressively to put a ceiling on inflation, then let monetary policy work its way through the economy. And we can always back off so we’re having to let inflation guide policy rather than our models guide policy. And that’s challenging. It’s challenging because there are lags that you’re well aware of. But the most important thing that people should take away from this. We’re totally committed to getting inflation back down to 2%. Not two and a half, not three, get it back down to 2%. And we’re going to get that done. Now. Is it going to take two years is it going to take a little longer? I’m not exactly sure, but we’re going to get it done.”
“But are you nimble?” the host asked. “We asked a question on our fed survey they said is the Fed data dependent? Are they going to five no matter what, and it was pretty much divided a lot of people thinking you’re not really watching the data, and you’re heading to five no matter what, which is kind of like saying, you know, we’re driving the car again into a brick wall, perhaps?”
“Yeah, I don’t agree with that at all,” Kashkari responded. “I mean, look at the job report that we’ve just been talking about. This these are things that we pay a lot of attention to, we pay a lot of attention to short term moves and inflation, to services, inflation, all of this, and we’re pretty close to five now.”
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