In an essay released on Wednesday, Federal Reserve Governor Christopher Waller conceded that the central bank’s response to inflation post-pandemic deviated from the conventional playbook. Waller, along with Fed senior adviser Jane Ihrig, emphasized the need for flexibility in policy language to adapt to changing economic and financial conditions.
Waller stated, “Overall, the (Federal Open Market Committee’s) response to tightening after the COVID pandemic was not textbook,” revealing that the commitments made during the pandemic became restrictive as inflation surged. The acceleration of halting asset purchases and the fastest interest rate hikes in three decades were deemed necessary.
The essay highlighted the importance of lessons learned, with the authors suggesting that Fed statements should use language enabling the Committee to respond flexibly to evolving economic and financial landscapes. The 2020 commitment to maintaining loose monetary policy until post-pandemic job market recovery and inflation above the 2% target hampered the Fed’s ability to react promptly as prices exceeded expectations.
Waller and Ihrig clarified that their intent was not to criticize recent Fed decisions but to evaluate policy strategies for potential future crises. The authors underscored that policy rules and past rate-hike criteria would have allowed interest rate increases in spring 2021, contrary to the Fed’s actual actions, which saw the first rate hike in March 2022.
Despite acknowledging stable financial markets, a robust labor market, and declining inflation from its peak, the authors suggested that their observations could be pertinent to an upcoming review of the Fed’s operating framework. This review may reconsider the emphasis on the job market and the commitment to lift inflation above the target to compensate for shortfalls, which acted as constraints during the recent inflationary period.
