How the Fed and the Biden Administration Got Inflation Wrong
Officials applied an old playbook to a new crisis. ‘We fought the last war.’
In recent weeks, top officials in the Biden administration and Federal Reserve have publicly conceded that they made mistakes in their handling of
inflation.
Behind their errors was a misreading of the economy.
Advisers to President Biden and Fed officials worried the Covid-19 pandemic and related restrictions would bring similar consequences to the 2007-09 financial crisis: weak demand, slow growth, long periods of high unemployment and too-low inflation. So, they applied the last playbook to the new crisis. The Fed redeployed low-interest-rate policies that it believed had been effective and generally benign and promised not to pull back prematurely. Elected officials concluded they had relied too heavily on the Fed previously, and decided to spend more aggressively this time, starting with President Donald Trump and capped off with President Biden’s $1.9 trillion stimulus.