Like John Puri, I think the Fed has raised interest rates too slowly and too little. I also agree with his implicit criticism of the Fed for lack of transparency about its decision.
Jason Furman speculates that the Fed may be operating on the understanding “that some of the [current] inflation is the transitory result of tariffs and the Iran conflict — and that, at worst, these will raise the price level once and then stop adding to inflation.” He adds that it may thus be “looking through supply shocks, as it has generally done in the past.”
I think the Fed should look through supply shocks. Increases in energy prices as a result of the Iran war are not a justification for tighter monetary policy — and decreases in energy prices once the conflict is over wouldn’t be a justification for looser money.
But even if we set aside energy prices, monetary policy is too loose. Today’s release from the Bureau of Economic Analysis shows that in the last quarter, GDP grew at an annual rate, in current dollar terms, of 5.6 percent. Regardless of what is happening or is about to happen to oil prices, there’s too much money sloshing around this economy to reach the Fed’s 2 percent target for inflation.