Don't expect the Fed to work miracles

Much as expected, the Federal Reserve has raised its policy interest rate by half a percentage point and announced an accelerated schedule for reducing its holdings of financial assets. This is a faster pace of tightening than the central bank intended after its previous meeting in March. With inflation at 5.2 per cent on the Fed’s preferred measure and little sign yet that it’s about to subside, this adjustment makes sense. But it leaves some questions unanswered.

The Fed’s task under current conditions is extraordinarily difficult. After the pandemic slammed output in 2020, the economy recovered strongly — too strongly, as it turned out, thanks to an unduly powerful fiscal stimulus enacted by Congress. Covid’s effects were still complicating economic policy when Russia invaded Ukraine, causing the US and its allies to impose brutal sanctions that disrupted energy and commodity markets all over again. Now China’s initial success in containing the virus has given way to massive new shutdowns, putting yet more stress on global supply chains.

Faced with such turbulence, monetary policy can only do so much. Holding the economy on a steady path of non-inflationary growth is all but impossible. The most the Fed can do is avoid making the problem worse with unforced policy errors.