The Great Inflation Of 2021 Is Still Haunting The Fed

The surge of inflation that took hold after the pandemic is still hurting household budgets and still very much on the minds of officials at the Federal Reserve.

In recent public speeches, Fed officials talked about the long shadow of the burst of price increases in 2021 and 2022, and how that high inflation is still lingering in a diminished form. The Consumer Price Index rose 2.7% over the year in December—far lower than the four-decade high of 9% in 2022, but remaining above the elusive 2% goal for nearly five years.

Fed officials held the central bank’s key interest rate steady at their most recent meeting last month, after cutting it by a quarter-point at the previous three meetings to boost the job market. Concerns about inflation kept them from cutting the rate again, several Fed members said this week.

The fed funds rate influences borrowing costs on all kinds of loans. The Federal Open Market Committee typically lowers it to encourage spending and boost the job market, and raises it to do the opposite and push down inflation.

This week, Fed officials continued to mull whether inflation or the threat of joblessness posed the biggest risk to the central bank’s dual mandate to keep prices stable and employment high, and how much they should cut interest rates in the months ahead, if at all.

“While we’ve made a lot of progress on inflation, it still remains above our target,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in a speech in South Carolina on Tuesday, according to prepared remarks. “That’s been the case since 2021.”

Among the complex forces affecting the inflation outlook: whether housing costs will continue their recent trend of cooling down, and whether the tariff-related price increases will just be a one-time blip, or whether they’ll gain momentum and turn into sustained inflation.

“It would be easy to blame the one-time effect of tariffs or measurement lags in shelter costs, but I take this sustained miss seriously,” Barkin said.

Those concerns were shared by Raphael Bostic, president of the Atlanta Fed, in an interview with CNBC last week.

“My concern for the past three or four years has been that inflation is too high, and we’ve got to get it down to the 2% target,” Bostic said. “We’ve made good progress, but for the last two years or so we’ve been kind of stuck in place in this high 2s, low 3s range. I would say that we should be waiting and be more patient.”

Fed officials are also balancing concerns about the health of the job market, as employers have cut back on hiring over the past year.

Fed Governor Michelle Bowman, unlike Bostic and Barkin, said she was confident inflation would fall to 2% in the coming months and that the Fed should cut its key interest rate three times over the next year.

“I recognize and appreciate that other FOMC members may be concerned that inflation remains somewhat elevated and that we have not achieved our inflation goal for some time,” Bowman said in a speech according to prepared remarks. “However, absent a clear and sustained improvement in labor market conditions, we should be ready to adjust policy to bring it closer to neutral.”

Bowman said she would not want to “immediately” react if upcoming government reports show inflation ran unexpectedly high in January, since the data could be distorted by seasonal adjustment factors.

The FOMC is widely expected to hold its key rate steady for its next two meetings, at least until June, after the term in office of Fed Chair Jerome Powell expires. Traders are pricing in a 66% chance of a June rate cut, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

A Look Back

If Fed officials needed a reminder of how unpredictable the economy can be, they could have found it in recently released transcripts of old FOMC meetings, which are made public only after a five-year delay. That means the Fed’s deliberations from early 2020 are now being posted publicly for the first time.

In the most recent meeting transcripts available, FOMC members grappled with the onset of the COVID-19 pandemic in an emergency meeting on March 15, 2020. FOMC members viewed a wave of unemployment as the main threat at the time. In response, they slashed interest rates to near zero and held them there for more than a year.

What they didn’t anticipate at the time was that the pandemic would disrupt supply chains, eventually leading to a surge of inflation.

“The net effect of the virus is likely to be disinflationary, not inflationary,” then-Governor Richard Clarida said. “COVID-19 may well disrupt some supply chains, but it represents a huge shock to aggregate demand.”

Indeed, Fed officials were more worried about inflation being below the 2% target than it being too high.

“Even when the pandemic abates, inflation is going to be an ongoing concern,” San Francisco Fed President Mary Daly said at the time.

That experience is on the minds of current Fed officials, seven of whom were on the FOMC in 2020, including Barkin.

“Inflation spiked, helping us remember a painful lesson from the ’70s—just how much we all hate inflation,” he said this week. “It feels unfair, it creates uncertainty, and frankly it’s just exhausting to have to negotiate with suppliers or customers or to shop around for better prices.”