The Fed's "Transitory" Mistake Is Affecting Its Outlook

The Federal Reserve was criticized for calling post-pandemic inflation "transitory," but in hindsight, inflation did prove temporary in a broader economic sense. The Fed's mistake was not the label, but rather its late response to raising interest rates and halting quantitative easing. The massive surge in government deficit spending and the Fed's quantitative easing campaign caused a jump in economic growth and inflation. The Fed kept stimulus going for too long, allowing inflation to burn hotter and longer than necessary. Despite elevated levels of total economic stimulus, inflation and economic growth have subsided as the economy normalizes. Historical examples of inflationary episodes, such as post-WWII inflation and the 1970s stagflation, show how they eventually resolved. The COVID-driven inflation surge stands out for its rapid onset and swift decline, and by 2025, inflation is back to near-target levels. The Fed's current warning about tariffs may be misguided, as inflation data shows no measurable impact from recent tariff actions. The risk is that the Fed may overcompensate on the cautious side, fearing another inflation flare-up that may never materialize, and undermine an already slowing economy.