It is too early to say whether the Fed made a mistake by raising rates in December

WITH stock markets in turmoil and market-implied inflation expectations tumbling, is it time to conclude that the Federal Reserve's interest rate rise in December was premature? My colleague R.A thinks so. The Fed, according to doves, moved too soon to raise rates because it feared, wrongly, that a wage-price spiral might take off. Here is R.A:

Why might the Fed need to tighten abruptly? The only reason to do so would be for fear that tightening gradually in the face of rising inflation would not prevent the emergence of an inflationary spiral between wages and prices, pushed ahead by rising inflation expectations. Most of the members of the Fed's monetary-policy committee began their professional careers in the 1970s or early 1980s, a period characterised by high inflation—and, eventually, by Fed-induced recessions intended to wring inflationary pressures out of the economy. 

This is harsh on the Fed. It is true that Janet Yellen, the Fed's chair, emphasises the labour market in her assessment of future inflationary pressure. But she does not refer to wage-price spirals. Instead, she makes a simpler­­­­—and harder to dispute­­­­—claim: that the amount of slack in the economy is a leading indicator of...Continue reading

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