A former Federal Reserve Bank president says the U.S. central bank has “bungled” its response to surging inflation by waiting too long to tackle the problem.
 
“The Fed reacted slowly – it dismissed concerns at first. And then it continued to add stimulus in the form of asset purchases. Only in November did it start reducing the rate of purchases,” said Jeffrey Lacker, former president of the Federal Reserve Bank of Richmond, in an interview Thursday. 
 
“The Fed was very slow to recognize how serious the inflation problem was.”
 
Investors heard it time and time again from U.S. Federal Reserve Chair Jerome Powell that red hot inflation was temporary. But that hasn't proven to be the case. 
 
U.S. consumer prices grew at an eye-popping seven per cent in December year-over-year, a level not seen in decades.
 
“The Fed has a lot to answer for. I think they really bungled last year. Early in the year, inflation began to surge. It was clearly the result of fiscal stimulus and other packages that were passed last winter, adding more to disposable consumer income,” Lacker said. 
 
“[Inflation] proved to be more persistent than they thought. That was evident in June or July. It’s broadened out to a wider range of commodities, it’s seeped into wage increases and wages are accelerating. Moreover, and this is the deadly piece of the puzzle, it’s become embedded in expectations.”
 
The U.S. Fed signaled to the market that an interest rate hike is likely to come in March, and acknowledged that its dual mandate of inflation and full employment had been met. Bloomberg data shows investors are expecting roughly four rate increases this year. 
 
“One of the most noteworthy things that [had] been overlooked yesterday is [the Fed] capitulated on their old view about maximum employment as a timeless parameter that is out there. They’ve recognized that it evolves over time. And maximum employment is where we are right now,” Lacker said. 
 
One of the biggest risks with waiting too long to fight inflation rather than deploying pre-emptive rate hikes, according to Lacker, is that it’s difficult to know how aggressive to be in tightening policy. 
 
“It’s really easy to make a mistake in this environment and be forced to move too fast,” he said.