As Inflation Soars, the Fed Needs to Keep Its Head

So much for transitory. U.S. prices rose by 7% in 2021, the highest gain for nearly 40 years. Remember: The Federal Reserve’s target for inflation is 2%, a fact that gets less attention than it used to, back when “hawks” and “doves” were measuring deviations in tenths of a percentage point. It’s an enormous overshoot, and some of it is likely to prove persistent without corrective action.

The good news is that the Fed can no longer be accused of playing down the risks. In the past two months, its policy stance has moved briskly from patience to concern, with a hint of alarm. Chair Jerome Powell told lawmakers this week that he regarded inflation as a “severe threat.” So far, to its credit, the central bank has accomplished this abrupt shift in messaging without roiling financial markets. Investors expect the Fed’s bond-buying program to be promptly wound down and have calmly penciled in four increases in interest rates this year, starting in March.