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A growing chorus is urging the Federal Reserve to slow down lest it “break things.” If you’re paying attention, you should be nervous about growing financial strains in the U.S. and around the world. But the underlying U.S. inflation rate is worse and employment is stronger than they were when the Fed announced the tapering of asset purchases in November 2021. Until there has been tangible progress on inflation, not mere wishful forecasts, the Fed shouldn’t let up—a process that could easily take the federal-funds rate above 5% next year.
Those urging the Fed to slow down make four reasonable but uncompelling arguments. The first is that monetary policy works with long and variable lags. Let the medicine that has already been administered do its work before continuing to step up the dosage. One issue with this view is that two-thirds of the tightening, as measured by the Goldman Sachs financial conditions index, actually happened more than five months ago. A lot of tightening is already working, and it isn’t doing enough.
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