The Fed’s Use of Data-dependent Decisions Can’t Be Applicable Only When It Supports Their Beliefs

The Federal Reserve and the CPI Report

Given that we just saw the greatest level of inflation in the previous 40 years, the December CPI data was a pleasant relief as inflation continues to gradually decline. The total inflation rate reached an alarming 9.1% high just six months ago. After reading 0.329% in April and 0.118% in May 2020, the historical increase in inflation was a protracted process.

At first, inflation increased gradually, reaching its peak in December 2020 at 0.812. The greatest monthly amount of inflation, 2.487%, occurred in January 2020. Nevertheless, that year's average inflation rate was 1.234%. It made sense for the Federal Reserve to take action since inflation was well below its 2% objective.

Inflation reached its peak in 2021, with an annual average of 4.698%. By 0.62% in March of that year, inflation had surpassed the Federal Reserve's 2% objective and had started to rise consistently, with practically every subsequent month coming in hotter than the one before. The rate of inflation increased over 4% in April, came very near to 5% in May, and ended the year at a troubling 7.036%.

However, the Federal Reserve did nothing, sticking to its stance that the recent spike in inflation was temporary and will subside on its own without any help from the Federal Reserve. A degree of inflation add up that had not been seen in forty years was brought on by this unfounded premise.

Inflation levels in January 2022 started at 7.48% and increased steadily, reaching a peak of slightly over 9% in June.

Nevertheless, the Federal Reserve persisted in holding the mistaken belief that a 40-year high inflation rate would naturally decline. The Federal Reserve made one of the worst mistakes in predictions and forward guidance in recent history, which led to the most unsuitable course of action: doing nothing while inflation keeps rising.

I think the Federal Reserve is now committing one of its worst mistakes in recent memory. When questioned about their forward guidance not so long ago, the Federal Reserve would immediately cite their go-to response: "Our actions will be data driven and establish our future guidance to shape our choices in relation to our monetary policy."

Since June, when inflationary pressures peaked at 9.1%, we have seen a systematically steady and continuous reduction in inflationary levels, which has reduced inflation by about one-third. The Federal Reserve's recent move clearly achieved its intended goal of reducing inflation, even if we still have a ways to go before reaching its 2% objective. But there is broad agreement among Federal Reserve board members that they will maintain high interest rates and may even carry out another rate increase to achieve their target of slightly over 5.