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The Fed's mistakes that led to this inflation mess

MARY LOUISE KELLY, HOST:

The Federal Reserve raised interest rates yet again earlier this month in its fight to bring down inflation. Some are asking, why didn't the Fed act sooner? Darian Woods and Wailin Wong from our daily economics podcast The Indicator talked to one former Fed official who thinks some of the reasons are all too human.

DARIAN WOODS, BYLINE: Bill Nelson spent two decades working for the Federal Reserve, and he's now the chief economist of the bank lobbying group the Bank Policy Institute. And Bill says there are a few reasons why the Fed took so long to act. The first - trying to avoid the mistakes of the recent past.

BILL NELSON: Sort of lingering regret over having tightened perhaps too soon out of concern for inflation that didn't materialize.

WOODS: The chair of the Fed, Jerome Powell, didn't want to lift interest rates too soon and risk unnecessarily crashing the markets and putting a whole bunch of people out of work, which was Powell's lesson from the 2010s.

WAILIN WONG, BYLINE: And that brings us to reason No. 2 - a concern over inequality. When interest rates are low, businesses can borrow and expand more easily. That means a faster recovery, and that is particularly beneficial for low-wage workers, who are disproportionately Black and Latino.

WOODS: Bill says this was especially salient for the Fed in the wake of the 2020 Black Lives Matter protests.

NELSON: I think that that led the Fed to redouble their desire to try to do something about unequal incomes.

WONG: Bill's reason No. 3 for the Fed being slow is basically that the Fed fumbled its communication, at least in hindsight. So think back to the early days of the pandemic. Here's Jerome Powell around that time.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: We're not thinking about raising rates. We're not even thinking about thinking about raising rates.

WONG: Remember - interest rates were basically at zero. And so central banks wanted to reassure markets that they'd stay low for a long time into the future.

WOODS: But then, by June 2021, inflation had shot up to 5%. So Jerome Powell was in this bind. Does he break that promise not to tighten policy and instead nip inflation in the bud? Bill thinks that they had messed up communication. He says they could have given themselves more wiggle room while still being forceful, not committing so strongly to low rates for so long. And the fourth factor that Bill cites is one that I think we can all relate to - a belief that normal was just around the corner.

NELSON: I would call it a belief that the future will be like the past. Inflation had been at or below 2% for over a decade, and so it was very difficult to reach the conclusion that things were going to do other than come back to 2%.

WOODS: Of course, events intervened, and we did not get back to normal. Now Bill wrote these reasons kind of as part of a bad report card for the Fed last year. But he's more comfortable with the Fed's actions raising rates now.

NELSON: The staff and the policymakers at the Fed are as good as they get. And so I have a lot of confidence in the crew, you know, to bring this off. If it can be done, that's the team that could do it.

WOODS: Bill just wishes they had started sooner.

WONG: Wailin Wong.

WOODS: Darian Woods, NPR News.

(SOUNDBITE OF J DILLA SONG, "THINK TWICE") Transcript provided by NPR, Copyright NPR.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.
Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.