Tuesday, February 7th @ 11:00-12:30 PM
Drawing on work in progress, we examine the sources of the recent inflation, the Federal Reserve’s response, and the likely implications. We present evidence that the sharp rise in inflation reflects a mix of supply factors (particularly in the early stages) and an overheated economy (particularly later). The overheated economy, in turn, appears to have been caused in part by highly expansionary fiscal policy and the Federal Reserve’s slowness in tightening policy. We show that the sharp tightening of monetary policy since mid-2022 is similar to numerous anti-inflationary shifts in monetary policy since World War II. The evidence from those episodes suggests that little of the impact of the recent tightening has yet occurred, that the impact on real activity is likely to be substantial, and that the impact on inflation is highly uncertain.