unbeknownst to many the gift for the 43rd anniversary of marriage is entertainment to stretch it further this fall marks the 43rd anniversary of a pivotal event in the history of the federal reserve and the us economy while it may be more like watching a horror movie the fed has provided the markets with a lot of entertainment this year paul volcker thenchairman of the fed took decisive action on oct 6 1979 to tame the great inflation a period of outofcontrol inflation that had been eroding economic strength since the mid1960s  read more inflation is still running hot as us producer prices rise what you need to know the us economy would have continued to decline without his audacious change in monetary policy and his resolve to stay with it through many difficult years volcker laid the groundwork for the protracted economic expansions of the 1980s and 1990s by abandoning the shortsighted policies of his predecessors at the federal reserve board building in washington dc where current chair jerome powell is battling to control inflation that is on the verge of reaching 40year highs volckers powerful words still reverberate through the halls some 43 years later in an august address in jackson hole wyoming powell echoed volckers strategy the fed will tolerate a recession as the cost of battling inflation “we must keep at it until the job is done” powell said invoking the title of volcker’s 2018 autobiography “keeping at it” but the inflation of 2022 is different from what it was in the 1980s and according to economist paul krugman the “hardliners” who want the fed to keep tightening are relying on arguments that “seem to be conceptually wrong” krugman laid out his argument to his 43 million twitter followers on wednesday saying that the great inflation period of the 1980s was riddled with expectations and these days all available evidence says that inflation expectations are still anchored which means that analogies with the volcker disinflation are all wrong also read fed minutes warn investors interest rates may be higher for longer what does that mean peoples expectations of inflations longterm value serve as its anchor the anchor is lost if expectations consistently shift or if they diverge from the central banks aim according to data the anchor may have begun to drift as early as 1967 and this may have been seen long before policymakers identified the problem this methods efficacy for measuring the inflation anchor in real time was confirmed by using predicted data from brazil turkey south africa and the us in the 1970s and in 2021 economic theory attributes a particularly important significance to expectations as the cause of inflation any inflation rate is consistent with the same real results and welfare according to the longrun classical dichotomy in order to control inflation the fed must largely control the expectations of the public which are impacted by regulations regimes of policy and monetary standards “first theres the argument that the continuing tightness of us labor markets says that we still havent tightened enough” krugman noted “this seems odd given what i thought was a universal view that monetary policy works with substantial lags” it’s true there are five recognized lags in monetary policy and data lag is one of them policymakers are unaware of the precise timing of economic events an economic shift that begins at the beginning of the month typically manifests itself in the middle of the following month therefore there is a 15month data lag research on forwardlooking statistics continues to suggest that inflation is heading lower in the upcoming quarters despite the fact that backwardlooking inflation measures present a perplexing image the majority of economic statistics that have been made public over the previous few months reflect a winding down of many of the factors that increased inflation in the wake of covid some recognize that the delay between changes in the supply and demand equation and a decline in the rate of inflation has been painfully slow and others think these developments will lead to a reduction in price pressures in the upcoming year the feds preference for backwardlooking inflation data over more comprehensive forwardlooking economic data is the main cause for concern for instance at the board meeting on june 15 the fed officials median projection was that the fed funds rate would be 34 by the end of 2022 compare that anticipation to the meeting on sept 21 where the prediction for the end of the year was a rate of 44 now take into account that the fed thought it would raise rates by a total of 25 basis points for the entire year of 2022 one year ago the conclusion is that the fed rather than paying attention to what forwardlooking reports are suggesting is using lagging data to make reactionary choices the fed is skating to where the puck was borrowing a phrase from the great wayne gretzky “we know that the strong dollar will take a while to hit trade flows mortgage rate rises are clearly having a big effect on housing but construction employment has yet to decline” krugman wrote “surely much of the impact of the tightening so far lies in the future” data from the bls shows that the cpi rent index lags a full year behind rents paid by new tenants which means that core inflation is likely to stay high because of big rent rises in the past “that isnt a reason for tight monetary policy” krugman said “if newtenant rents are leveling off which seems to be happening this says that conventional measures of core inflation are about the past not a good indicator of whether the economy is overheated now” the economist noted that its possible that the fed hasn’t tightened enough but “that’s a quantitative question and hard to answer in this strange new economic environment but the hardliner arguments im hearing seem to rest on dubious logic”  want to stay uptodate on jerome powell news check this out photo courtesy of commonwealth club and rafael saldaña on flickr