Research indicates that combating inflation often leads to quick results that do not last. A study by the International Monetary Fund showed that countries typically succeed in rapidly reducing inflation, but it rises again.
Lessons from History
The International Monetary Fund reviewed data from over 100 “shocks” of inflation since the 1970s. It found that in 60% of cases, it took countries an average of three years to bring inflation back to pre-shock levels. In the remaining cases, inflation failed to return to its pre-shock levels, even after five years.
Deserved Attention?
Since March 2022, the Federal Reserve has raised its benchmark rate from near zero to between 5.25% and 5.50%, its highest level since January 2001. In the process, consumer inflation in the United States fell to 3.1% over the 12 months ending in November, a two-thirds decline from the peak of 9.1% in June 2022.
Balancing Short and Long Term
William Luther, an economics professor at Florida Atlantic University and director of the Sound Money Project at the American Institute for Economic Research, believes the Federal Reserve made the right decision with its message on Wednesday. He notes that the Federal Reserve’s mandate from Congress requires it to monitor inflation, and the Federal Reserve considers the level that triggers this to be 2%. Practically, the Federal Reserve does this, which is why Luther praised the updated approach of the central bank.
Ultimately, there is no guarantee that the Federal Reserve will succeed in any way, and Luther believes that the Federal Reserve will roughly reduce its target for the nominal rate as expected inflation decreases. In this scenario, he sees little chance of inflation resuming.
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